Question

For the year ended December 31, 2021, Fidelity Engineering reported pretax accounting income of $1,048,000. Selected information for 2021 from Fidelity’s records follows:

Interest income on municipal governmental bonds	$	104,000
Depreciation claimed on the 2021 tax return in excess of depreciation on the income statement		128,000
Carrying amount of depreciable assets in excess of their tax basis at year-end		232,000
Warranty expense reported on the income statement		62,000
Actual warranty expenditures in 2021		52,000

Fidelity's income tax rate is 25%. At January 1, 2021, Fidelity's records indicated balances of zero and $26,000 in its deferred tax asset and deferred tax liability accounts, respectively.

Required:
1. Determine the amounts necessary to record income taxes for 2021, and prepare the appropriate journal entry.
2. What is Fidelity’s 2021 net income?

Answer 1

1)

Particulars	Amount (In '000)	Rate of Tax	Tax	Recorded as
Pretax accounting income	$1,048
Permanent difference:
Interest on Municipal bonds	-$104
Income subject to taxation	$944	25%	$236	Income tax expense
Temporary difference:
Depreciation	-$128	25%	-$32	Deferred tax liability
Warranty expense	$10	25%	$2.50	Deferred tax Assets
Income taxable in current year	$826	25%	$206.50	Income tax payable

Journal Entries - Fidelity Engineering (in'000)
Event	Particulars	Debit	Credit
1	Income tax expense	$236.00
	Deferred tax assets	$2.50
	Income taxes payable		$206.50
	Deferred tax liability		$32.00
	(To record income tax expense)

2)

Fidelity net income for 2021 = Pretax income - Income tax expense

= $1,048 - $236

= $812

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