Question

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?

Answer 1

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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