Question

The following information has been obtained for Sarasota Corporation.

1.		Prior to 2020, taxable income and pretax financial income were identical.
2.		Pretax financial income is $1,769,000 in 2020 and $1,323,000 in 2021.
3.		On January 1, 2020, equipment costing $1,236,000 is purchased. It is to be depreciated on a straight-line basis over 5 years for tax purposes and over 8 years for financial reporting purposes. (Hint: Use the half-year convention for tax purposes, as discussed in Appendix 11A.)
4.		Interest of $66,000 was earned on tax-exempt municipal obligations in 2021.
5.		Included in 2021 pretax financial income is a gain on discontinued operations of $188,000, which is fully taxable.
6.		The tax rate is 20% for all periods.
7.		Taxable income is expected in all future years.

Prepare the journal entry to record 2021 income tax expense, income taxes payable, and deferred taxes. (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.)

Account Titles and Explanation	Debit	Credit

Prepare the bottom portion of Sarasota’s 2021 income statement, beginning with “Income from continuing operations before income taxes.” (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Sarasota Corporation Income Statement (Partial)                                                                       December 31, 2021For the Year Ended December 31, 2021For the Quarter Ended December 31, 2021
Applicable Income TaxCurrentDeferredDividendsExpensesGain on Discontinued OperationsIncome from Continuing OperationsIncome from Continuing Operations before Income TaxesIncome Tax ExpenseNet Income / (Loss)Retained Earnings, January 1Retained Earnings, December 31RevenuesTotal ExpensesTotal Revenues		$
Applicable Income TaxCurrentDeferredDividendsExpensesGain on Discontinued OperationsIncome from Continuing OperationsIncome from Continuing Operations before Income TaxesIncome Tax ExpenseNet Income / (Loss)Retained Earnings, January 1Retained Earnings, December 31RevenuesTotal ExpensesTotal Revenues
Applicable Income TaxCurrentDeferredDividendsExpensesGain on Discontinued OperationsIncome from Continuing OperationsIncome from Continuing Operations before Income TaxesIncome Tax ExpenseNet Income / (Loss)Retained Earnings, January 1Retained Earnings, December 31RevenuesTotal ExpensesTotal Revenues	$
Applicable Income TaxCurrentDeferredDividendsExpensesGain on Discontinued OperationsIncome from Continuing OperationsIncome from Continuing Operations before Income TaxesIncome Tax ExpenseNet Income / (Loss)Retained Earnings, January 1Retained Earnings, December 31RevenuesTotal ExpensesTotal Revenues
Applicable Income TaxCurrentDeferredDividendsExpensesGain on Discontinued OperationsIncome from Continuing OperationsIncome from Continuing Operations before Income TaxesIncome Tax ExpenseNet Income / (Loss)Retained Earnings, January 1Retained Earnings, December 31RevenuesTotal ExpensesTotal Revenues
Applicable Income TaxCurrentDeferredDividendsExpensesGain on Discontinued OperationsIncome from Continuing OperationsIncome from Continuing Operations before Income TaxesIncome Tax ExpenseNet Income / (Loss)Retained Earnings, January 1Retained Earnings, December 31RevenuesTotal ExpensesTotal Revenues
AddLess:                                                                       Applicable Income TaxCurrentDeferredDividendsExpensesGain on Discontinued OperationsIncome from Continuing OperationsIncome from Continuing Operations before Income TaxesIncome Tax ExpenseNet Income / (Loss)Retained Earnings, January 1Retained Earnings, December 31RevenuesTotal ExpensesTotal Revenues
Applicable Income TaxCurrentDeferredDividendsExpensesGain on Discontinued OperationsIncome from Continuing OperationsIncome from Continuing Operations before Income TaxesIncome Tax ExpenseNet Income / (Loss)Retained Earnings, January 1Retained Earnings, December 31RevenuesTotal ExpensesTotal Revenues		$

Indicate how deferred income taxes should be presented on the December 31, 2021, balance sheet.

Sarasota Corporation Balance Sheet (Partial)                                                                       December 31, 2021For the Year Ended December 31, 2021For the Quarter Ended December 31, 2021
Current AssetsCurrent LiabilitiesIntangible AssetsLong-term InvestmentsLong-term LiabilitiesProperty, Plant and EquipmentStockholders' EquityTotal AssetsTotal Current AssetsTotal Current LiabilitiesTotal Intangible AssetsTotal LiabilitiesTotal Liabilities and Stockholders' EquityTotal Long-term InvestmentsTotal Long-term LiabilitiesTotal Property, Plant and EquipmentTotal Stockholders' Equity
					$

Answer 1

Computation of taxable income and income tax payable for 2021

Particulars	Amount
Pre-tax financial income	1323000
Add: depreciation as per book (1236000/8)	154500
Less: depreciation as per income tax (1236000/5)	(247200)
Less: exempt interest income municipal obligations	(66000)
Taxable income	1164300
Income tax payable 20%	232860

.

Journal entry  

	Accounts titles and explanation	Debit	credit
	Income tax expense (1323000*20%)	264600
	Income tax payable (1164300*20%)		232860
	Differed tax liability		31740

.

Sarasota Corporation

Income statement (partial)

For the year December 31, 2021

Income from continuing operation before income tax	1323000
Income tax	(264600)
Income from continuing operation		1058400
Discontinued operations
Gain on Discontinued operations		188000
Net income		1246400

                                                                                                      

.

Sarasota Corporation

Balance sheet (partial)

For the year December 31, 2021

Non-current liabilities
Deferred tax liability	31740