Question

Shannon Polymers uses straight-line depreciation for financial reporting purposes for equipment costing $660,000 and with an expected useful life of 4 years and no residual value. 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 $760,000, which includes interest revenue of $18,000 from municipal bonds. Other than the two described, there are no differences between accounting income and taxable income. The enacted tax rate is 35%. 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 1

Pretax accounting income = $760,000

Depreciation as per books =
`(660,000)/(4)`

= $165,000

Depreciation as per income tax = $660,000 × 40%

= $264,000

Interest revenue on municipal bonds = $18,000

Taxable Income:

= Pretax accounting income + Depreciation as per books - Depreciation as per income tax - Interest revenue on municipal bonds

= $760,000 + $165,000 - $264,000 - $18,000

= $643,000

Income Tax Liability = 35% × Taxable Income

= 0.35 × $643,000

= $225,050

Temporary difference resulting in future taxable amount:

= Depreciation as per income tax - Depreciation as per books

= $264,000 - $165,000

= $99,000

Deferred Tax Liability = 35% × $99,000

= $34,650

Journal Entries - Shannon Polymers

Income Tax Expense A/c Dr $259,700

To Income Tax Payable $225,050

To Deferred Tax Liability $34,650

(Being income tax and deferred tax recorded for first year)