Question

Shannon Polymers uses straight-line depreciation for financial reporting purposes for equipment costing $700,000 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 $800,000, which includes interest revenue of $21,000 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. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

--Required journal entry

Accounts title	Debit	Credit
Income Tax Expense	$194,750
Deferred Tax Liability		$26,250
Income Tax Payable		$168,500
(Income taxes recorded)

--Workings

Working		Straight Line Depreciation	Depreciation as per Income tax	Temporary Difference
A	Original Cost	$700,000	$700,000
B	Life (years)	4
C = A/B	Accounting depreciation	$175,000
D = A x 40% in Year 1	Income tax depreciation allowed		$280,000
	Total Depreciation expense	$175,000	$280,000	$105,000

		Tax Rate	Tax $	Recorded as:
Pretax accounting income	$800,000
Permanent Difference	($21,000)
Income Subject to taxation	$779,000	25%	$194,750	Income tax expense
Temporary Difference	($105,000)	25%	($26,250)	Deferred Tax Liability
Income taxable in current year	$674,000	25%	$168,500	Income Tax Payable