Question

Assume the following facts for Munoz Company in 2016. Munoz reported pretax financial income of $800,000. In addition, Munoz reported the following differences between its pretax financial income and taxable income: • Interest income of $80,000 was received during 2016 from an investment in municipal bonds. This income is exempt for tax purposes. • Rent income of $40,000 was collected in 2015 and included for tax purposes during that year. For financial statement purposes, it will be reported as earned equally in 2016 and 2017. • An asset with a 5-year life was purchased during 2016; straight-line depreciation for book purposes was $50,000. MACRS depreciation expense for 2016 was $100,000. • Warranty expense of $20,000 was recognized on the 2016 income statement, while $4,000 was recognized for tax purposes. (Assume a 1-year warranty contract.) The balance of the Deferred Tax Asset account (debit) at January 1, 2016, was $16,000 as a result of the rent income temporary difference. The tax rate for all years was 40%. Munoz has positive verifiable evidence of future taxable income. Required: 1. Calculate the amount of Munoz’s 2016 taxable income. 2. Prepare Munoz’s income tax journal entry at the end of 2016. 3. Calculate Munoz’s effective income tax rate for 2016.

Answer 1

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