Question

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%.

Answer 1

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