Question

In: Accounting

Southern Atlantic Distributors began operations in January 2018 and purchased a delivery truck for $40,000. Southern...

Southern Atlantic Distributors began operations in January 2018 and purchased a delivery truck for $40,000. 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 50% of cost in 2018, 30% in 2019, and 20% in 2020. Pretax accounting income for 2018 was $260,000, which includes interest revenue of $30,000 from municipal bonds. The enacted tax rate is 30%.

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?
  

Solutions

Expert Solution

[1]

Tax Rate

Tax $

Recorded as:

Pretax accounting income

$260,000

Permanent Difference

$30,000

Income Subject to taxation

$230,000

Temporary Difference

$10,000

30%

$3,000

Deferred Tax Liability

Income taxable in current year

$220,000

30%

$66,000

Income Tax Payable

Accounts title

Debit

Credit

Income Tax Expense

$69,000

   Deferred Tax Liability

$3,000

   Income Tax Payable

$66,000

(Income taxes recorded)

--Working

Working

Straight Line Depreciation

Depreciation as per Income tax

Temporary Difference

A

Original Cost

$40,000

$40,000

B

Life (years)

4

C = A/B

Accounting depreciation

$10,000

D = A x 50% in Year 1

Income tax depreciation allowed

$20,000

Total Depreciation expense

$10,000

$20,000

$10,000

[2]

Income before Income taxes

$260,000

Less: Income tax expense

$69,000

Net Income for 2018

$191,000


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