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 2020 – which is the SECOND year of using this machine – is $150,000, which includes interest revenue of $20,000 from municipal bonds. The enacted tax rate is 30% for all years. There are no other differences between accounting and taxable income.

Prepare the JE for 2020

Answer 1

Depreciation in the accounting book (120000/4)	30,000
Depreciation in the income tax purposes (120000*30%)	36,000
Temorary difference	6,000

	Pretax financial income	150,000
	Permanent differences
Less:	Interest income on municipal bonds	(20,000)
	Pretax financial income after adjusted to permanent differences	130,000
	Temporary differences
Less:	Lower recorded depreciation expense in books	6,000
	Taxable income	124,000
Multiply:	Tax rate	0
	Income tax payable	37,200

Answer :-

Date	Account title and explanation	Debit	Credit
Dec 31, 2020	Income Tax Expense (130000*30%)	39,000
	Deferred Tax Liability (6000*30%)		1,800
	Income Tax Payable		37,200
	(To record Income Tax Expense for the period.)