Question

Cheyenne Company reports pretax financial income of $70,000 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 $15,100.
2.		Rent collected on the tax return is greater than rent recognized on the income statement by $23,200.
3.		Fines for pollution appear as an expense of $10,300 on the income statement.

Cheyenne’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.

Compute taxable income and income taxes payable for 2020.

Taxable income		$enter a dollar amount
Income taxes payable		$enter a dollar amount

Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2020. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Prepare the income tax expense section of the income statement for 2020, beginning with the line “Income before income taxes.” (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Compute the effective income tax rate for 2020. (Round answer to 1 decimal places, e.g. 25.5%.)

Effective income tax rate

enter the Effective income tax rate in percentages rounded to 1 decimal place

Answer 1

Working Note-1 Computation of Taxable income & Tax Payable
pretax Financial income	$70,000.00
Less: Excess Depreciation as per Tax Return	-$15,100.00
Add: Rent Excess Considered fpr Tax Return	$23,200.00
Add: Penalty Disallowed	$10,300.00
Taxable income	$88,400.00
Tax@ 30%	$26,520.00

Working Note-2: Computation of DTA / DTL
Differences	Amount	Tax @30%	DTL	DTA
Depreciation	$15,100.00	$4,530.00	$4,530.00	$0.00
Rent Collected	$23,200.00	$6,960.00	$0.00	$6,960.00
Fines	$10,300.00	$3,090.00	$0.00	$0.00
Total			$4,530.00	$6,960.00

Journal Entries
Date	General Journal	Debit	Credit
Dec-31	Income tax Expense	$26,520.00
	Income tax payable		$26,520.00
Dec-31	Deferred Tax Assets	$6,960.00
	Deferred Tax		$6,960.00
Dec-31	Deferred Tax	$4,530.00
	Deferred Tax Liability		$4,530.00
Dec-31	Deferred Tax (6960-4530)	$2,430.00
	Income Tax Expense		$2,430.00

Income Tax Expense Section
Income before Income tax		$70,000.00
Less: Income Tax Expense
Current Tax	$26,520.00
Deferred Tax expense	-$2,430.00	$24,090.00
Income after income tax		$45,910.00

Computation of Effective Income Tax Rate
Income Tax Expense (A)	24090
Income Before Tax (B)	70000
Effective Tax Rate (A/B)	34.41%