Question

In: Accounting

2.For the year ended December 31, 2018, Fidelity Engineering reported pretax accounting income of $977,000. Selected...

2.For the year ended December 31, 2018, Fidelity Engineering reported pretax accounting income of $977,000. Selected information for 2018 from Fidelity’s records follows:

Interest income on municipal bonds $32,000

Depreciation claimed on the 2018 tax return in excess of depreciation on the income statement 55,000

Carrying amount of depreciable assets in excess of their tax basis at year-end 85,000

Warranty expense reported on the income statement 26,000

Actual warranty expenditures in 2018 16,000

Fidelity’s income tax rate is 40%. At January 1, 2018, Fidelity’s records indicated balances of zero and $12,000 in its deferred tax asset and deferred tax liability accounts, respectively.

Required:

1. Determine the amounts necessary to record income taxes for 2018, and prepare the appropriate journal entry.

2. What is Fidelity’s 2018 net income?

Solutions

Expert Solution

Answer :

Required 1 :-

(a)

Tax rate

(b)

Tax

(a × b)

Recorded as:
Pretax accounting income $977,000
Permanent difference:
Interest income on municipal bonds ($32,000)
Income subject to taxation ($977,000 - $32,000) $945,000 × 40% = $378,000 Income tax expense

Temporary difference

Depreciation ($55,000) × 40% = ($22,000) Deferred tax liability
Warranty expense ($26,000 - $16,000) $10,000 × 40% = $4,000 Deferred tax assets
Taxable income $900,000 × 40% = $360,000

Income tax payable

Journal entries necessary to record income taxes for 2018 are as follows :-

Event Particu Debit Credit
1 Income tax expense Dr $378,000
Deferred tax assets Dr $4,000
            To Income taxes payable $360,000
            To Deferred tax liability $22,000
(To record income tax expense)

Required 2 :-

Fidelity’s 2018 net income are as follows :-

Amount
Pretax Accounting Income $977,000
Less: Income tax expense ($378,000)
Net Income $599,000

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