Question

For the year ended December 31, 2021, Fidelity Engineering reported pretax accounting income of $1,052,000. Selected information for 2021 from Fidelity’s records follows:

Interest income on municipal governmental bonds	$	108,000
Depreciation claimed on the 2021 tax return in excess of depreciation on the income statement		132,000
Carrying amount of depreciable assets in excess of their tax basis at year-end		240,000
Warranty expense reported on the income statement		64,000
Actual warranty expenditures in 2021		54,000

Fidelity's income tax rate is 25%. At January 1, 2021, Fidelity's records indicated balances of zero and $27,000 in its deferred tax asset and deferred tax liability accounts, respectively.

Required:
1. Determine the amounts necessary to record income taxes for 2021, and prepare the appropriate journal entry.
2. What is Fidelity’s 2021 net income?
  

Answer 1

1.

Particulars	Amount (In '000)	Rate of Tax	Tax	Recorded as
Pretax accounting income	$1,052.00
Permanent difference:
Interest on Municipal bonds	-$108.00
Income subject to taxation	$944.00	25%	$236.00	Income tax expense
Temporary difference:
Depreciation	-$132.00	25%	-$33.00	Deferred tax liability
Warranty expense	$10.00	25%	$2.50	Deferred tax Assets
Income taxable in current year	$822.00	25%	$205.50	Income tax payable

Journal Entries - Fidelity Engineering (in'000)
Event	Particulars	Debit	Credit
1	Income tax expense Dr	$236.00
	Deferred tax assets Dr	$2.50
	To Income taxes payable		$205.50
	To Deferred tax liability		$33.00
	(To record income tax expense)

Solution 2: Fidelity net income for 2021 = Pretax income - Income tax expense = $1052 - $236 = $816 thousands