Question

Zekany Corporation would have had identical income before taxes on both its income tax returns and income statements for the years 2018 through 2021 except for differences in depreciation on an operational asset. The asset cost $280,000 and is depreciated for income tax purposes in the following amounts:

2018 $ 92,400

2019 123,200

2020 42,000

2021 22,400

The operational asset has a four-year life and no residual value. The straight-line method is used for financial reporting purposes. Income amounts before depreciation expense and income taxes for each of the four years were as follows. 2018 2019 2020 2021 Accounting income before taxes and depreciation $ 150,000 $ 170,000 $ 160,000 $ 160,000 Assume the average and marginal income tax rate for 2018 and 2019 was 30%; however, during 2019 tax legislation was passed to raise the tax rate to 40% beginning in 2020. The 40% rate remained in effect through the years 2020 and 2021. Both the accounting and income tax periods end December 31. Required: Prepare the journal entries to record income taxes for the years 2018 through 2021.

Answer 1

1. For the year 2018, Profit before tax and depreciation is 150000. Depreciation is 92400. So the Taxable income would be 150000-92400= 57600.

income tax expense would be 30% of 57600 = 17280. as tax rate for 2018 was 30%.

Journal would be.

Profit loss a/c Dr. 17280

To Income tax a/c 17280

at the time of making the payment

Income tax a/c Dr. 17280

to bank/cash a/c 17280

2.Similarly for the year 2019, Taxable income is 170000-123200= 46800, Tax payable is 30% of 46800 = 14040

Journal would be

Profit loss a/c Dr. 14040

To income tax a/c 14040,

at the time of payment,

Income tax a/c Dr. 14040

to Bank/cash a/c 14040

3. In the beginning of 2020 the tax rate was increased to 40%.

so in the year 2020, taxable income = 160000-42000=118000, income tax expense = 40% of 118000

Profit loss a/c Dr. 47200

To Income tax a/c 47200

at the time of making payment

Income tax a/c Dr. 47200

To cash/bank 47200

4. For the year 2021 tax rate is still 40%,

so taxable income = 160000-22400 =137600

Income tax expense = 40% of 137600= 55040

Journal would be,

Profit loss a/c Dr. 55040

To Income tax a/c 55040.

at the time of making the payment,

Income tax a/c Dr. 55040

To bank/cash a/c 55040