Question

Riverbed Company reports pretax financial income of $63,900 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 $17,600.
2.		Rent collected on the tax return is greater than rent recognized on the income statement by $23,300.
3.		Fines for pollution appear as an expense of $11,800 on the income statement.

Riverbed’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.

Compute taxable income and income taxes payable for 2020.

Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2020.

Compute the effective income tax rate for 2020.

Answer 1

(A)    Calculate taxable income and income taxes payable for 2020       

Particulars	Amount ($)
Pretax financial income	63900
Less:-Depreciation on the tax return is greater than depreciation	-17600
Add:-Rent collected on the tax return is greater than rent earned	23300
Add:-Fines for pollution appear as an expense	11800
Taxable income	81400
Income tax payable @30%	24420

(B)       Journal entry to record income tax expenses, deferred income taxes, and income tax payable for 2020                                            Debit($)          Credit($)

                        Income tax expenses                         $22710           

                        Deferred tax asset ($23300*0.30)      $6990

                           Income tax payable                                                $24420

                             Deferred tax liability ($17600*.30)                       $5280

            (To record the income tax expense, deferred tax & income tax payable for 2020)

(C ) Effective income tax rate          

Effective income tax rate = income tax expenses

                                         Income before income taxes

                                         

=22710                       

63900

=35.54%

(A)    Calculate taxable income and income taxes payable for 2020       

Particulars	Amount ($)
Pretax financial income	63900
Less:-Depreciation on the tax return is greater than depreciation	-17600
Add:-Rent collected on the tax return is greater than rent earned	23300
Add:-Fines for pollution appear as an expense	11800
Taxable income	81400
Income tax payable @30%	24420

(B)       Journal entry to record income tax expenses, deferred income taxes, and income tax payable for 2020                                            Debit($)          Credit($)

                        Income tax expenses                         $22710           

                        Deferred tax asset ($23300*0.30)      $6990

                           Income tax payable                                                $24420

                             Deferred tax liability ($17600*.30)                       $5280

            (To record the income tax expense, deferred tax & income tax payable for 2020)

(C ) Effective income tax rate          

Effective income tax rate = income tax expenses/ Income before income taxes

                            =22710/63900

                            =35.54%