Question

Victoria Company purchased a $100,000 conveyor belt for use in its main factory. It has a 4 year useful life and a $0 salvage value. For the following 4 years Victoria recorded sales revenue of $300,000 each year and $200,000 in expenses, NOT INCLUDING DEPRECIATION nor INCOME TAX EXPENSE. Victoria uses straight-line depreciation method for financial accounting (“book”) purposes and MACRS for tax accounting purposes. Under MACRS, Victoria can apply accelerated depreciation for the asset using the following percentages:

YEAR 1 - 50%, YEAR 2 - 30%, YEAR 3 - 15%, and YEAR 4 - 5%. The income tax rate is 40%

a. Prepare the complete JOURNAL ENTRY to record income tax expense for YEAR 2.

b. Prepare the complete JOURNAL ENTRY to record income tax expense for YEAR 4.

c. What is the BALANCE of the Deferred Tax Asset or Liability account at the end of YEAR 3?

Answer 1

Depreciation under Both the methods and Deferred tax asset/liability
			Depreciation	Depreciation	Cumulative Difference
			Under SLM	under MACRS	in dep
Year-1			25000		50000		25000	(Higher income in books)
Year-2			25000		30000		30000	(higher income in books)
Year-3			25000		15000		20000	(higher income in books)
Year-4			25000		5000		0
Net Income each year as per books
			1	2	3	4
Revenues			300000	300000	300000	300000
Less: Expense		200000	200000	200000	200000
Less: Depreciation as per SLM	25000	25000	25000	25000
Before tax income		75000	75000	75000	75000
Tax @40%		30000	30000	30000	30000
Net Income each year as per MACRS tax
			1	2	3	4
Revenues			300000	300000	300000	300000
Less: Expense		200000	200000	200000	200000
Less: Depreciation as per Macrs	50000	30000	15000	5000
Before tax income		50000	70000	85000	95000
Tax @40%		20000	28000	34000	38000
Deferred Tax liability- balance	10000	12000	8000	0
(cumulative)
Journal entries
S.no.	Accounts title and explanations		Debit $	Credit$
a.	Income tax expense			30000
	Deferred tax liability			2000
	Income tax payable			28000
b.	Income tax expense			30000
	Deferrred tax liability		8000
	Income tax payable			38000
balance of Deferrred tax liability at the end of Year-3:	8000