Question

Shannon Polymers uses straight-line depreciation for financial reporting purposes for equipment costing $780,000 and with an expected useful life of four years and no residual value. Assume that, 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 $880,000, which includes interest revenue of $25,000 from municipal governmental bonds. Other than the two described, there are no differences between accounting income and taxable income. The enacted tax rate is 25%.
   
Prepare the journal entry to record income taxes.

Answer 1

• The journal entry would be

Accounts title	Debit	Credit
Income Tax Expense	$213,750
Deferred Tax Liability		$29,250
Income Tax Payable		$184,500
(Income taxes recorded)

• Workings

Working		Straight Line Depreciation	Depreciation as per Income tax	Temporary Difference
A	Original Cost	$780,000	$780,000
B	Life (years)	4
C = A/B	Accounting depreciation	$195,000
D = A x 40% in Year 1	Income tax depreciation allowed		$312,000
	Total Depreciation expense	$195,000	$312,000	$117,000

		Tax Rate	Tax $	Recorded as:
Pretax accounting income	$880,000
Permanent Difference	($25,000)
Income Subject to taxation	$855,000	25%	$213,750	Income tax expense
Temporary Difference	($117,000)	25%	($29,250)	Deferred Tax Liability
Income taxable in current year	$738,000	25%	$184,500	Income Tax Payable