In: Accounting
Chapter 16- prob. 7
Zekany Corporation would have had identical income before taxes on both its income tax returns and income statements for the years 2018 through 2021 except for differences in depreciation on an operational asset. The asset cost $290,000 and is depreciated for income tax purposes in the following amounts:
2018 $ 95,700
2019 127,600
2020 43,500
2021 23,200
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:
2018 2019 2020 2021
Accounting income before taxes and depreciation $155,000 $175,000 $165,000 $165,000
Assume the average and marginal income tax rate for 2018 and 2019 was 30%; however, during 2019 tax legislation was passed to raise the tax rate to 40% beginning in 2020. The 40% rate remained in effect through the years 2020 and 2021. Both the accounting and income tax periods end December 31.
Required: Prepare the journal entries to record income taxes for the years 2018 through 2021. (If no entry is required for a transaction/event, write “No journal entry required” in the first account field.)
Date |
General Journal |
Date |
Credit |
Solution:
Computation of Taxable Income and Income Tax Payable | ||||
Particulars | 2018 | 2019 | 2020 | 2021 |
Accounting income before taxes and depreciation | $155,000.00 | $175,000.00 | $165,000.00 | $165,000.00 |
Less: Depreciation as per Income tax | $95,700.00 | $127,600.00 | $43,500.00 | $23,200.00 |
Taxable Income | $59,300.00 | $47,400.00 | $121,500.00 | $141,800.00 |
Income Tax Payable | $17,790.00 | $14,220.00 | $48,600.00 | $56,720.00 |
Computation of Deferred Tax | ||||
Particulars | 2018 | 2019 | 2020 | 2021 |
Depreciation as per Income Tax | $95,700.00 | $127,600.00 | $43,500.00 | $23,200.00 |
Depreciation as per Books | $72,500.00 | $72,500.00 | $72,500.00 | $72,500.00 |
Taxable Temporary differences | $23,200.00 | $55,100.00 | $0.00 | $0.00 |
Reversible Temporary differences | $29,000.00 | $49,300.00 | ||
Deferred
tax liability to be recorded 2018 - $23,200*30% 2019 - ($55,100*40% + $23,200*10%) |
$6,960.00 | $24,360.00 | $0.00 | $0.00 |
Reversal of Deferred tax liability | $11,600.00 | $19,720.00 |
Journal Entries - Zekany Corporation | |||
Year | Particulars | Debit | Credit |
2018 | Income Tax Expense Dr | $24,750.00 | |
To Income tax Payable | $17,790.00 | ||
To Deferred tax liability | $6,960.00 | ||
(To record income tax and deferred tax for 2018) | |||
2019 | Income Tax Expense Dr | $38,580.00 | |
To Income tax Payable | $14,220.00 | ||
To Deferred tax liability | $24,360.00 | ||
(To record income tax and deferred tax for 2019) | |||
2020 | Income Tax Expense Dr | $37,000.00 | |
Deferred tax liability Dr | $11,600.00 | ||
To Income tax Payable | $48,600.00 | ||
(To record income tax and deferred tax for 2020) | |||
2021 | Income Tax Expense Dr | $37,000.00 | |
Deferred tax liability Dr | $19,720.00 | ||
To Income tax Payable | $56,720.00 | ||
(To record income tax and deferred tax for 2019) |