Question

Zekany Corporation would have had identical income before taxes on both its income tax returns and income statements for the years 2016 through 2019 except for differences in depreciation on an operational asset. The asset cost $300,000 and is depreciated for income tax purposes in the following amounts:

  

2016	$	99,000
2017		132,000
2018		45,000
2019		24,000

  

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.

  

	2016			2017			2018			2019
Accounting income before taxes and depreciation	$	160,000		$	180,000		$	170,000		$	170,000

  

Assume the average and marginal income tax rate for 2016 and 2017 was 30%; however, during 2017 tax legislation was passed to raise the tax rate to 40% beginning in 2018. The 40% rate remained in effect through the years 2018 and 2019. Both the accounting and income tax periods end December 31.

   

Required:

Prepare the journal entries to record income taxes for the years 2016 through 2019. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.) 1 Record 2016 income taxes. 2 Record 2017 income taxes. 3 Record 2018 income taxes. 4 Record 2019 income taxes.

Answer 1

Ans-Preparing the journal entries to record income taxes for the years 2016 through 2019:-

For 2016:-

Date	Account Title and Explanation	Debit	Credit
December 31, 2016	Income tax expense A/c Dr.	$25,500
	Deferred tax liability A/c		$7,200
	Income tax payable A/c		$18,300
	(To record the income tax due)

For 2017:-

Date	Account Title and Explanation	Debit	Credit
December 31,2017	Income tax expense A/c Dr.	$39,600
	Deferred tax liability A/c		$25,200
	Income tax payable A/c		$14,400
	(To record the income tax due)

For 2018:-

Date	Account Title and Explanation	Debit	Credit
December 31,2018	Income tax expense A/c Dr.	$25,500
	Deferred tax liability A/c Dr.	$12,000
	Income tax payable A/c		$37,500
	(To record the income tax due)

For 2019:-

Date	Account Title and Explanation	Debit	Credit
December 31,2019	Income tax expense A/c Dr.	$23,400
	Deferred tax liability A/c Dr.	$20,400
	Income tax payable A/c		$43,800
	(To record the income tax due)

Working Notes:

1- Compute the tax payable for year 2016 to 2019 as given below:

Calculation of tax payable

Particulars	2016	2017	2018	2019
Pretax accounting income	$160,000	$180,000	$170,000	$170,000
Less: Depreciation for tax	$99,000	$132,000	$45,000	$24,000
Taxable income	$61,000	$48,000	$125,000	$146,000
Tax rate	30%	30%	30%	30%
Tax payable	$18,300	$14,400	$37,500	$43,800

2- Compute temporary difference as given below:-

Calculation of temporary difference

Particulars	2016	2017	2018	2019	Cumulative temporary difference
Straight line depreciation	$75,000 ($300,000/4)	$75,000 ($300,000/4)	$75,000 ($300,000/4)	$75,000 ($300,000/4)
Less: Tax depreciation	$99,000	$132,000	$45,000	$24,000
Temporary differences	-$24,000	-$57,000	$30,000	$51,000
2016					$24,000
2017					$81,000
2018					$51,000
2019					0

3- Compute deferred tax liability as given below:-

Computation of deferred tax liability

Particulars	2016	2017	2018	2019
Cumulative difference	$24,000	$81,000	$51,000	0
Tax rate	30%	40%	40%	40%
Year end balance	$7,200	$32,400	$20,400	0
Add: Previous balance	0	-$7,200	-$32,400	-$20,400
Credit (Debit)	$7,200	$25,200	-$12,000	-$20,400