Question

South Texas Luxury Apartments reports pretax financial income of $68,400 for 2019. The following items cause taxable income to be different than pretax financial income. 1. Depreciation on the tax return is greater than depreciation on the income statement by $17,000. 2. Rent collected on the tax return is greater than rent recognized on the income statement by $21,000. 3. Fines for pollution appear as an expense of $10,300 on the income statement. South Texas Luxury Apartments tax rate is 40% for all years, and the company expects to report taxable income in all future years. There are no deferred taxes at the beginning of 2019.

Required:
Prepare a reconciliation between Financial Income and Taxable Income and then prepare the journal entry to record income taxes.

Answer 1

Pretax financial income for 2017 $68,400

Excess Depreciation tax -$17,000

Excess rent collected $21,000

Nondeductible fines $10,300

Taxable income $82,700

Enacted tax rate 40% 0.4

Income tax payable $33,080

Date Account Title Debit Credit

Income Tax expense $31,480

Deferred tax asset $8,400

(21,000*40/100)

Income tax payable $33,080

Deferred tax liability $6,800

(17,000*40/100)