Question

Southern Atlantic Distributors began operations in January 2018 and purchased a delivery truck for $100,000. Southern Atlantic plans to use straight-line depreciation over a four-year expected useful life for financial reporting purposes. For tax purposes, the deduction is 45% of cost in 2018, 30% in 2019, and 25% in 2020. Pretax accounting income for 2018 was $580,000, which includes interest revenue of $80,000 from municipal bonds. The enacted tax rate is 40%.

Assuming no differences between accounting income and taxable income other than those described above:

Required:
1. Complete the following table given below and prepare the journal entry to record income taxes in 2018.
2. What is Southern Atlantic’s 2018 net income?

Answer 1

· [1]

		Tax Rate	Tax $	Recorded as:
Pretax accounting income	$580,000
Permanent Difference	($80,000)
Income Subject to taxation	$500,000	40%	$200,000	Income tax expense
Temporary Difference	($20,000)	40%	($8,000)	Deferred Tax Liability
Income taxable in current year	$480,000	40%	$192,000	Income Tax Payable

Accounts title	Debit	Credit
Income Tax Expense	$200,000
Deferred Tax Liability		$8,000
Income Tax Payable		$192,000
(Income taxes recorded)

· [2]

Income before Income taxes	$580,000
Less: Income tax expense	$200,000
Net Income for 2018	$380,000

· Workings

Working		Straight Line Depreciation	Depreciation as per Income tax	Temporary Difference
A	Original Cost	$100,000	$100,000
B	Life (years)	4
C = A/B	Accounting depreciation	$25,000
D = A x 45% in Year 1	Income tax depreciation allowed		$45,000
	Total Depreciation expense	$25,000	$45,000	$20,000