Question

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?
  

Answer 1

[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