Question

Shannon Polymers uses straight-line depreciation for financial reporting purposes for equipment costing $560,000 and with an expected useful life of 4 years and no residual value. For tax purposes, the deduction is 40%, 30%, 20%, and 10% in those years. Pretax accounting income the first year the equipment was used was $660,000, which includes interest revenue of $13,000 from municipal bonds. Other than the two described, there are no differences between accounting income and taxable income. The enacted tax rate is 30%.
   
Prepare the journal entry to record income taxes.

Answer 1

Solution:

Computation of Taxable Income and Income Tax and deferred tax Liability - Shannon Polymers
Particulars		Amount
Pre Tax Accounting Income		$660,000.00
Add: Depreciation as per books	$560,000/4	$140,000.00
Less: Depreciation as per income tax	$560,000*40%	$224,000.00
Less: Interest revenue on mucipal bonds		$13,000.00
Taxable Income		$563,000.00
Tax Rate		30%
Income Tax Liability		$168,900.00
Temporary difference resulting in future taxable amount		$84,000.00
Deferred Tax Liability		$25,200.00

Journal Entries - Shannon Polymers
Particulars	Debit	Credit
Income Tax Expense Dr	$194,100.00
To Income Tax Payable		$168,900.00
To Deferred Tax Liability		$25,200.00
(Being income tax and deferred tax recorded for first year)