Question

Headland Company reports pretax financial income of $76,500 for 2020. The following items cause taxable income to be different than pretax financial income. 1. Depreciation on the tax return is greater than depreciation on the income statement by $15,700. 2. Rent collected on the tax return is greater than rent recognized on the income statement by $23,400. 3. Fines for pollution appear as an expense of $10,500 on the income statement. Headland’s tax rate is 30% for all years, and the company expects to report taxable income in all future years. There are no deferred taxes at the beginning of 2020.

A)Compute taxable income and income taxes payable for 2020.

B)Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2020.

c)Prepare the income tax expense section of the income statement for 2020, beginning with the line “Income before income taxes.”

D)Compute the effective income tax rate for 2020

Answer 1

A)

	Amount in $
Pretax Income:	76,500
Less: Excess Depreciation	(15,200)
Add: Rent collected excess over recognised	23,400
Add: Fines	10,500
Taxable Income	95,200
Tax rate	30%
Tax Payable	28,560

B)

Accounts Title	Debit	Credit
Income Tax Expense	26,100
Deferred Tax Assets	2,460
Income Tax Payable		28,560

C)

	Amount in $
Income before Income Tax	76,500
Less: Income Tax Expense	(26,100)
Income after Tax	50,400

D)

Effective rate of Income Tax = Tax Expense / Income before income tax

= 26100 / 76500

=34.11%

Working Note:

Temporary diffrence
	Amount in $
Excess Rent taxable (Tax Income - Book Income)	23,400
Excess Depreciation ( Book Dep. - Tax Dep.)	(15,200)
Excess Income as per tax	8,200
Tax rate	30%
Deferred tax assets	2,460

Fine is a permanent diffrence, so not taken for DTA / DTL Calculation.