Question

Southern Corporation began operations in January 2019 and purchased a machine for $120,000 at that time. Southern uses straight-line depreciation over a four-year period for financial reporting purposes. For tax purposes, the deduction is 50% of cost in 2019, 30% in 2020, and 20% in 2021. Pretax accounting income for 2021 – which is the THIRD year of using this machine – is $140,000, which includes interest revenues of $20,000 from municipal bonds. In December 31, 2020 the enacted tax rate had been changed from 30% to 20% starting in2021. There are no other differences between accounting and taxable income.

Prepare the JE for 2021

Answer 1

	For 2021 beginning deferred tax workings-
	WDV at beginning in books	30,000
	WDV at beginning in tax	24,000
	Temporary difference	6,000
	Deferred tax liability at beginning	1,800
	Computation of tax payable-
	Pre-tax income	140,000
	Add: depreciation in books	30,000
	Less: depreciation in tax	(24,000)
	Less: exempted municipal bond interest	(20,000)
	Taxable income	126,000
	Tax rate	20%
	Tax payabe	25,200
Date	Accounts	Debit	Credit
2021	Income tax expenses A/c---Dr	25,200
	Deferred tax liability A/c---Dr	1,800
	To Tax payable A/c		25,200
	To Deferred tax benefit A/c		1,800
	(Being opening DTL reversed and tax expenses recorded for 2021)