Question

Exercise 19-04 Wildhorse Company reports pretax financial income of $76,100 for 2020. 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 $16,700.

2. Rent collected on the tax return is greater than rent recognized on the income statement by $22,700.

3. Fines for pollution appear as an expense of $11,100 on the income statement. Wildhorse’s tax rate is 30% for all years, and the company expects to report taxable income in all future years. There are no deferred taxes at the beginning of 2020.

1. Compute taxable income and income taxes payable for 2020.

2. Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2020. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

3. Prepare the income tax expense section of the income statement for 2020, beginning with the line “Income before income taxes.” (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

4. Compute the effective income tax rate for 2020. (Round answer to 1 decimal places, e.g. 25.5%.)

Answer 1

Answer:

1. Computation of taxable income and income tax payable for 2020.

Taxable Income= Pretax Financial Income+Rent collected in excess+Depreciation+Fine paid for pollution

Taxable Income=$76,100+$16,700+$22,700+$11,100

=$1,26,600

Income tax payable=Taxable Income* Tax rate

=$126600*30%

=$37,980

2. Journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2020.

Income Tax Expense A/c Dr $36,180   

Deferred Tax Asset A/c($22,700*30%) Dr $ 6,810

To Deferred Tax Liability A/c($16,700*30%) $ 5,010

To Tax payableA/c $37,980

(Entry for Income tax expense)

3. Preparation of income tax expense in the income statement for 2020.

Pretax Financial Income $76,100

Add: Deferred tax asset $ 6,810

Less: Deferred Tax Liability $( 5,010)

Less:Income tax payable $(37,980)

Net Income $39,920

4. Computation of the effective income tax rate for 2020

Effective Income tax rate=Tax Payable/Taxable Income*100

=$36,180/$1,26,600

=28.6%