Question

Heiden Company reported the following net income before taxes and depreciation for the years indicated.

2016: $80,000 2017: $100,000 2018: $75,000

The Company purchased assets costing $90,000 on January 1, 2016. The assets have a three-year useful life and no salvage value. For tax purposes the Company used an acceptable accelerated depreciation method that resulted in depreciation expense of $45,000; $30,000; and$15,000 for the three years respectively. For financial reporting purposes the straight-linemethodwas used. A 30% tax rate was in effect for the three years.

Instructions: Prepare the necessary calculations and make the end of year entries for the Heiden Company for the years 2016, 2017, 2018.

Answer 1

Solution:

Computation of Taxable Income and Income Tax Payable
Particulars	2016	2017	2018
Accounting income before taxes and depreciation	$80,000.00	$100,000.00	$75,000.00
Less: Depreciation as per Income tax	$45,000.00	$30,000.00	$15,000.00
Taxable Income	$35,000.00	$70,000.00	$60,000.00
Income Tax Payable	$10,500.00	$21,000.00	$18,000.00

Computation of Deferred Tax
Particulars	2016	2017	2018
Depreciation as per Income Tax	$45,000.00	$30,000.00	$15,000.00
Depreciation as per Books	$30,000.00	$30,000.00	$30,000.00
Taxable Temporary differences	$15,000.00	$0.00	$0.00
Reversible Temporary differences			$15,000.00
Deferred tax liability to be recorded	$4,500.00	$0.00	$0.00
Reversal of Deferred tax liability	$0.00	$0.00	$4,500.00

Journal Entries - Heiden Company
Year	Particulars	Debit	Credit
2016	Income Tax Expense Dr	$15,000.00
	To Income tax Payable		$10,500.00
	To Deferred tax liability		$4,500.00
	(To record income tax and deferred tax for 2016)
2017	Income Tax Expense Dr	$21,000.00
	To Income tax Payable		$21,000.00
	(To record income tax and deferred tax for 2017)
2018	Income Tax Expense Dr	$13,500.00
	Deferred tax liability Dr	$4,500.00
	To Income tax Payable		$18,000.00
	(To record income tax and deferred tax for 2018)