Question

Exercise 16-13 Multiple differences; calculate taxable income [LO16-1, 16-4, 16-6]

Southern Atlantic Distributors began operations in January 2018 and purchased a delivery truck for $120,000. Southern Atlantic plans to use straight-line depreciation over a four-year expected useful life for financial reporting purposes. For tax purposes, the deduction is 50% of cost in 2018, 30% in 2019, and 20% in 2020. Pretax accounting income for 2018 was $520,000, which includes interest revenue of $60,000 from municipal bonds. The enacted tax rate is 40%.

Assuming no differences between accounting income and taxable income other than those described above:

Required:
1. Complete the following table given below and prepare the journal entry to record income taxes in 2018.
2. What is Southern Atlantic’s 2018 net income?

		Tax Rate %		Tax $	Recorded as:
Pretax accounting income	$520,000
Permanent difference
Income subject to taxation	520,000	x
Temporary difference		x		=
Income taxable in current year	$520,000	x		=

Answer 1

[1]

		Tax Rate	Tax $	Recorded as:
Pretax accounting income	$520,000
Permanent Difference	$60,000
Income Subject to taxation	$460,000
Temporary Difference	$30,000	40%	$12,000	Deferred Tax Liability
Income taxable in current year	$430,000	40%	$172,000	Income Tax Payable

Accounts title	Debit	Credit
Income Tax Expense	$184,000
Deferred Tax Liability		$12,000
Income Tax Payable		$172,000
(Income taxes recorded)

--Working

Working		Straight Line Depreciation	Depreciation as per Income tax	Temporary Difference
A	Original Cost	$120,000	$120,000
B	Life (years)	4
C = A/B	Accounting depreciation	$30,000
D = A x 50% in Year 1	Income tax depreciation allowed		$60,000
	Total Depreciation expense	$30,000	$60,000	$30,000

• Requirement 2

Income before Income taxes	$520,000
Less: Income tax expense	$184,000
Net Income for 2018	$336,000