On January 1, 2008, Ameen Company purchased a building for $36 million. Ameen us
ID: 2368811 • Letter: O
Question
On January 1, 2008, Ameen Company purchased a building for $36 million. Ameen uses straight-line depreciation for financial statement reporting and MACRS for income tax reporting. At December 31, 2010, the carrying value of the building was $30 million and its tax basis was $20 million. At December 31, 2011, the carrying value of the building was $28 million and its tax basis was $13 million. There were no other temporary differences and no permanent differences. Pretax accounting income for 2011 was $45 million. 1. Prepare the appropriate journal entry to record Ameen's 2011 income taxes. Assume an income tax rate of 40%. 2. What is Ameen's 2011 net income?Explanation / Answer
Solution:
Requirement 1
Since taxable income is less than pretax accounting income, a future taxable amount will occur when the temporary difference reverses. This means a deferred tax liability should be recorded to reflect the future tax consequences of the temporary difference.
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Income tax expense (to balance) 140,000
Deferred tax liability ([$400,000 - 250,000] x 35%) 52,500
Income tax payable ($250,000 x 35%) 87,500
As a result, net income is $260,000:
Pretax accounting income $400,000
Income tax expense 140,000
Net income $260,000
Requirement 2
In its balance sheet, Alvis will report the $52,500 deferred tax liability among either its current or long-term liabilities depending on the cause of the temporary difference and the $87,500 income tax payable as a current liability.
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