Shannon Polymers uses straight-line depreciation for financial reporting purposes for equipment costing $800,000 and

Question

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.)

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Answer Journal entry Accounts title Debit Credit Income Tax Expense $220,000 Deferred Tax Liability $30,000 Income Tax Payable $190,000 (Income taxes recorded) Working for above 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

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

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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

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