Question

Zekany Corporation would have had identical income before taxes on both its income tax returns and income statements for the years 2018 through 2021 except for differences in depreciation on an operational asset. The asset cost $200,000 and is depreciated for income tax purposes in the following amounts: 2018 $ 66,000 2019 88,000 2020 30,000 2021 16,000 The operational asset has a four-year life and no residual value. The straight-line method is used for financial reporting purposes. Income amounts before depreciation expense and income taxes for each of the four years were as follows. 2018 2019 2020 2021 Accounting income before taxes and depreciation $ 110,000 $ 130,000 $ 120,000 $ 120,000 Assume the average and marginal income tax rate for 2018 and 2019 was 30%; however, during 2019 tax legislation was passed to raise the tax rate to 40% beginning in 2020. The 40% rate remained in effect through the years 2020 and 2021. Both the accounting and income tax periods end December 31. Required: Prepare the journal entries to record income taxes for the years 2018 through 2021. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Solution :

Computation of Accounting Income, Taxable Income and Income tax - Zekany Corporation
Particulars	2018	2019	2020	2021
Accounting income before depreciation and taxes	$110,000.00	$130,000.00	$120,000.00	$120,000.00
Less: book Depreciation	$50,000.00	$50,000.00	$50,000.00	$50,000.00
Pre tax accounting income	$60,000.00	$80,000.00	$70,000.00	$70,000.00
Accounting income before depreciation and taxes	$110,000.00	$130,000.00	$120,000.00	$120,000.00
Less: Depreciation as per income taxes	$66,000.00	$88,000.00	$30,000.00	$16,000.00
Taxable Income	$44,000.00	$42,000.00	$90,000.00	$104,000.00
Income tax rate	30%	30%	40%	40%
Income tax payable	$13,200.00	$12,600.00	$36,000.00	$41,600.00

Computation of Deferred Tax
Particulars	2018	2019	2020	2021
Depreciation as per income tax	$66,000.00	$88,000.00	$30,000.00	$16,000.00
Book depreciation	$50,000.00	$50,000.00	$50,000.00	$50,000.00
Taxable/ (reversable) temporary differences	$16,000.00	$38,000.00	-$20,000.00	-$34,000.00
Deferred tax liability (Reversal) 2018 - $16,000*30% 2019 - ($38,000*40% + $16,000*10%) 2020 = -$20,000*40% 2021 = -$34,000*40%	$4,800.00	$16,800.00	-$8,000.00	-$13,600.00

Journal Entries - Zekany Corporation
Date	Particulars	Debit	Credit
31-Dec-18	Income Tax Expense Dr	$18,000.00
	To Income tax payable		$13,200.00
	To Deferred tax liability		$4,800.00
	(To record income tax and deferred tax)
31-Dec-19	Income Tax Expense Dr	$29,400.00
	To Income tax payable		$12,600.00
	To Deferred tax liability		$16,800.00
	(To record income tax and deferred tax)
31-Dec-20	Income Tax Expense Dr	$28,000.00
	Deferred tax liability Dr	$8,000.00
	To Income tax payable		$36,000.00
	(To record income tax and reversal of deferred tax liability)
31-Dec-21	Income Tax Expense Dr	$28,000.00
	Deferred tax liability Dr	$13,600.00
	To Income tax payable		$41,600.00
	(To record income tax and reversal of deferred tax liability)