Question

In: Accounting

Paula Coal Company purchased equipment for $270,000 on January 2, 2021, its first day of operations....

Paula Coal Company purchased equipment for $270,000 on January 2, 2021, its first day of operations. For book purposes, the equipment will be depreciated using the straight-line method over three years with no salvage value. Pretax financial income and taxable income are as follows: 2021 2022 2023 Pretax financial income $156,000 $170,000 $180,000 Taxable income 120,000 170,000 216,000 The temporary difference between pretax financial income and taxable income is due to the use of accelerated depreciation for tax purposes.

Required for Part A: Prepare the journal entries to record income taxes for all three years (expense, deferrals, and liabilities) assuming that the enacted tax rate as of 2021 is 30% and on January 1, 2022, Congress raises the income tax rate to 35%.

Solutions

Expert Solution

Calculation:

2021 2022 2023
Book depreciation $90,000 $90,000 $90,000
Tax depreciation 126,000 90,000    70,000
Difference (36,000) 0 $54,000

Jouranl entries

2021 income tax expense $46,800
         Deferred tax liability($36,000@30%) $10,800
        income tax payable (194,000@30%) $36,000
2022 Income tax paayble $51,000
           Income tax payable ($170,000@30%) $51,000
2023 Income tax expense $75,600
            Deferred tax liability 10,800
           income tax payable ($216,000@30%) $64,800

(b)

2021 Income tax expense $46,800
           Deferred tax liablity $10,800
          income tax payable 120000@30% $36,000
2022 income tax expense $61,300
        Deferred tax liabilty (36,000@35% - $10,800) $1800
       Income tax payable 170,000@35% $59,500
2023 income tax expense 63,000
          Deferred tax liability 12,600
income tax payable 75,600

            


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