Question

Shannon Polymers uses straight-line depreciation for financial reporting purposes for equipment costing $640,000 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 $740,000, which includes interest revenue of $17,000 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.

Answer 1

Dr Income tax expense 253,050

Cr Income Tax Payable 219,450

Cr Deferred Tax Liability 33,600

Step-by-step explanation:

pretax accounting income $740,000

- interest on municipal bonds ($17,000)

- temporary tax difference ($96,000)

taxable income $627,000

current tax liability $627,000 x 35% = $219,450

tax depreciation - accounting depreciation = ($640,000 x 40%) - ($640,000 / 4) = $256,000 - $160,000 = $96,000

deferred tax liability $96,000 x 35% = $33,600

The deferred tax liability means that you paid less taxes today, but you will need to pay more taxes in the future due to the difference in accounting for depreciation expense.