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Homework answers / question archive / Shannon Polymers uses straight-line depreciation for financial reporting purposes for equipment costing $800,000 and with an expected useful life of four years and no residual value
Shannon Polymers uses straight-line depreciation for financial reporting purposes for equipment costing $800,000 and with an expected useful life of four years and no residual value. Assume that, for tax purposes, the deduction is 40%, 30%, 20%, and 10% in those years. Pretax accounting income the first year the equipment was used was $900,000, which includes interest revenue of $20,000 from municipal governmental bonds. Other than the two described, there are no differences between accounting income and taxable income. The enacted tax rate is 25%. Prepare the journal entry to record income taxes. (If no entry is required for a transaction/event, select "No journal entry required in the first account field.)
Answer
|
Accounts title |
Debit |
Credit |
|
Income Tax Expense |
$220,000 |
|
|
Deferred Tax Liability |
$30,000 |
|
|
Income Tax Payable |
$190,000 |
|
|
(Income taxes recorded) |
|
Tax Rate |
Tax $ |
Recorded as: |
||
|
Pretax accounting income |
$900,000 |
|||
|
Permanent Difference |
($20,000) |
|||
|
Income Subject to taxation |
$880,000 |
25% |
$220,000 |
Income tax expense |
|
Temporary Difference |
($120,000) |
25% |
($30,000) |
Deferred Tax Liability |
|
Income taxable in current year |
$760,000 |
25% |
$190,000 |
Income Tax Payable |
|
Working |
Straight Line Depreciation |
Depreciation as per Income tax |
Temporary Difference |
|
|
A |
Original Cost |
$800,000 |
$800,000 |
|
|
B |
Life (years) |
4 |
||
|
C = A/B |
Accounting depreciation |
$200,000 |
||
|
D = A x 40% in Year 1 |
Income tax depreciation allowed |
$320,000 |
||
|
Total Depreciation expense |
$200,000 |
$320,000 |
$120,000 |
