Question

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 is purchased in 2018 at a cost of $120,000 and is depreciated fully for income tax purposes in 2018. The operational asset has a four-year life and no residual value. The straight-line method is used for financial reporting purposes. Pretax accounting income amounts for each of the four years were as follows: 2018 2019 2020 2021 Pretax accounting income $90,000 80,000 70,000 70,000 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.

1. Prepare the year-end journal entries to record income taxes for 2018.

2. Prepare the year-end journal entries to record income taxes for 2019.

Answer 1

Solution 1 & 2:

Computation of Taxable Income and Income Tax Payable
Particulars	2018	2019	2020	2021
Pretax accounting income	$90,000.00	$80,000.00	$70,000.00	$70,000.00
Add: Depreciation as per books	$30,000.00	$30,000.00	$30,000.00	$30,000.00
Less: Depreciation as per Income tax	$120,000.00	$0.00	$0.00	$0.00
Taxable Income	$0.00	$110,000.00	$100,000.00	$100,000.00
Income Tax Payable	$0.00	$33,000.00	$40,000.00	$40,000.00

Journal Entries - Zekany Corporation
Year	Particulars	Debit	Credit
2018	Income Tax Expense Dr	$27,000.00
	To Deferred tax liability ($90,000*30%)		$27,000.00
	(To record income tax and deferred tax)
Journal Entries - Zekany Corporation
Year	Particulars	Debit	Credit
2019	Income Tax Expense Dr	$30,000.00
	Deferred tax liability Dr ($27,000 - $60,000*40%)	$3,000.00
	To Income tax Payable ($110,000*30%)		$33,000.00
	(To record income tax and deferred tax)