Question

Splish Company reports pretax financial income of $66,300 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 $16,200.
2.		Rent collected on the tax return is greater than rent recognized on the income statement by $21,100.
3.		Fines for pollution appear as an expense of $10,700 on the income statement.

Splish’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.

1. Compute taxable income and income taxes payable for 2020.

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

3. Prepare the income tax expense section of the income statement for 2020, beginning with the line “Income before income taxes.”

4. Compute the effective income tax rate for 2020.

Answer 1

1.

Taxable Income	$81,900
Income Taxes Payable	$24,570

Explanation:-

Pretax financial income for 2020	$66,300
Excess depreciation per tax return	($16,200)
Excess rent collected over rent earned	$21,100
Nondeductible fines	$10,700
Taxable income	$81,900
Taxable income	$81,900
Enacted tax rate	30%
Income Tax Payable ($81,900 × 30%)	$24,570

2.

Particular	Debit	Credit
Income Tax Expense	$23,100
Deferred Tax Asset ($21,100 × 30%)	$6,330
Income Tax Payable		$24,570
Deferred Tax Liability ($16,200 × 30%)		$4,860
(To record income tax expense, deferred income taxes, income taxes payable)

3.

Splish Company
Income Statement (Partial)
Year ended December 31, 2020
Income before income taxes		$66,300
Income tax expense - Current	$24,570
Income tax expense - Deferred (6,330 - $4,860)	($1,470)	$23,100
Net income/(loss) ($66,300-$23,100)		$43,200

4.

Effective income tax rate for 2020

34.8%

Explanation:-

Effective income tax rate = income tax expense/ income before income taxes

Effective income tax rate = $23,100/$66,300

Effective income tax rate = 34.8%