Question

Shannon Polymers uses straight-line depreciation for financial reporting purposes for equipment costing $760,000 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 $860,000, which includes interest revenue of $24,000 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%.

Required:
Prepare the journal entry to record income taxes.

Answer 1

Dr Income Tax Expense $209,000

Cr Income Tax Payable $180,500

Cr Deferred Tax Liability $28,500

Step-by-step explanation:

Preparation of the journal entry to record income taxes

First step is to determine the Current tax liability and Deferred tax liability

Current year Future year

Pre Tax Accounting Income $860,000 $0

Permanent differences

Municipal bond Interest ($24,000) $0

Temporary differences

Depreciation expense ($114,000) $114,000

[($760,000*40%)-($760,000/4)]

Taxable income $722,000 $114,000

Enacted tax rate 25% 25%

Current tax liability $180,500

($772,000*25%)

Deferred tax liability $28,500

($114,000*25%)

Now let Prepare the journal entry

Dr Income Tax Expense $209,000

($180,500+$28,500)

Cr Income Tax Payable $180,500

Cr Deferred Tax Liability $28,500

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