E19.4 (LO 1,2) (Three Differences, Compute Taxable Income, Entry for Taxes) Zuri

ID: 2334191 • Letter: E

Question

E19.4 (LO 1,2) (Three Differences, Compute Taxable Income, Entry for Taxes) Zurich Com- pany reports pretax financial income of $70,000 for 2020. The following items cause taxable income to be different than pretax financial income. 1. Depreciation on the tax return is greater than depreciation on the income statement by $16,000. 2. Rent collected on the tax return is greater than rent recognized on the income statement by $22,000. 3. Fines for pollution appear as an expense of $11,000 on the income statement. Zurich's tax rate is 30% for all years, and the company expects to report taxable income in all future years There are no deferred taxes at the beginning of 2020. Instructions a. Compute taxable income and income taxes payable for 2020. b. Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2020. c. Prepare the income tax expense section of the income statement for 2020, beginning with the line "Income before income taxes." d. Compute the effective income tax rate for 2020.

Explanation / Answer

a. Taxable income and income taxes payable for 2020:

Pre-tax financial income

70000

Less : Additional depreciation as per tax return

-16000

Add : Excess rent collected

22000

Add: Non deductible fines

11000

Taxable income

87000

Income tax payable ( 87000 * 30% )

26100

b. Journal Entry:

Account Titles and Explanation

Debit

Credit

Income tax expense (bal fig)

$24,300

Deferred tax asset

($22,000 x 30%)

$6,600

Income tax payable

$26,100

Deferred tax liability

($16,000 x 30%)

$4,800

c. Income Statement :

Income before income taxes

$70,000

Income tax expense - current

$26100

Income tax expense- deferred

($1800)

$24,300

Net income / (Loss)

$45700

d. Effective tax rate for 2020:

Effective tax rate = Tax provision / GAAP Income

= 24300 / 70000 = 34.71%