Question

Assume the following facts for Munoz Company in 2019. Munoz reported pretax financial income of $800,000. In addition, Munoz reported the following differences between its pretax financial income and taxable income:

•	Interest income of $60,000 was received during 2019 from an investment in municipal bonds. This income is exempt for tax purposes.
•	Rent income of $40,000 was collected in 2018 and included for tax purposes during that year. For financial statement purposes, it will be reported as earned equally in 2019 and 2020.
•	An asset with a 5-year life was purchased during 2019; straight-line depreciation for book purposes was $50,000. MACRS depreciation expense for 2019 was $100,000.
•	Warranty expense of $20,000 was recognized on the 2019 income statement, while $4,000 was recognized for tax purposes. (Assume a 1-year warranty contract.)

The balance of the Deferred Tax Asset account (debit) at January 1, 2019, was $16,000 as a result of the rent income temporary difference. The tax rate for all years was 40%. Munoz has positive verifiable evidence of future taxable income.

Required:

1.	Calculate the amount of Munoz’s 2019 taxable income.
2.	Prepare Munoz’s income tax journal entry at the end of 2019.
3.	Calculate Munoz’s effective income tax rate for 2019.

Answer 1

1)

calculation of taxable income of Munoz's for the year 2019:

PARTICULARS	AMOUNT
Income (before tax)	$800,000
LESS:Deprection expeses(Additinal )	($50,000)
LESS: rent income(Non taxable)	($20,000)
LESS: intrest income(Non taxable)	($60,000)
ADD:Warrenty expenses	$16,000
Taxable Income	$686,000

Working notes:

Additinal deprection expenses = MACRS deprection - Deprection

=$100,000 - $50,000

=$50,000

Non taxable rent income = Total rent income - rent income (2019)

=$40,000 - $20,000

=$20,000

Non deductible warrenty expenses = warrenty expenses- Reconized income

=$20,000-$4,000

=$16,000

2)

Income Tax journal entries at year end of 2019:

DATE	PARTICULARS	POST REF.	DEBIT	CREDIT
Dec. 31,2019	Income tax expenses(SE-)		$296,000
	Deffered tax assets(A+)		$6,400
	Deffered tax liabilities(A-)			$20,000
	Deffered tax assets(A-)			$8,000
	Income taxpayable(L+)			$274,400
	(To recored income tax Tax expenses with deferred tax assets and deferred tax liabilities)

WORKING CAPITAL:

Deffered tax asset    =warrenty expenses after deduction * tax

       =$ 16,000*40%

   =$6,400

Deffered tax liabilities    = deprection expenses*tax

=$50,000*40%

     =$20,000

Deffered tax asset =warrenty expenses

=$20,000*40%

=$8,000

Income tax payable   =taxable income *tax

  =$686,000*40%

=$274,400

NOTE:

INCOME TAX expenses is a share holders component and increase so it is debited

Deffered tax asset is an asset and increase , so it debited

Deffered tax labillity and increase ,so credited

Deffered tax asset ia an assets and decrease ,so it is credited

Deffered tax payable is a liability and increase ,so it is credited

(increase in assets and decrease in liabilities are debited and decrease in assets and increase liabilities are credited)

3)

Effective tax rate = Tax expenses /pretax income*100

=$274,400/686,000*40%

=16%

hence , the effective rate of tax is 16% for 2019

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