Texas Corporation began operations in January 2013 and purchased a machine for $
ID: 2420735 • Letter: T
Question
Texas Corporation began operations in January 2013 and purchased a machine for $21,000. Texas uses straight-line depreciation over a four-year period for financial reporting purposes. For tax purposes, the deduction is 50% of cost in 2013, 30% in 2014, and 20% in 2015. Pretax accounting income for 2013 was $116,000, which includes interest revenue of $30,000 from municipal bonds. The enacted tax rate is 35% for all years. There are no other differences between accounting and taxable income.
Required: Prepare a journal entry to record income taxes for the year 2013. Show well-labeled computations for the amount of income tax payable and the change in the deferred tax account.
Explanation / Answer
Depreciation as per financial reporting purposes = (Purchase cost - salvage value)/Useful life
Depreciation as per financial reporting purposes = (21000-0)/4
Depreciation as per financial reporting purposes = 5250
Depreciation as per taxation = 21000*50% = 10500
Pretax accounting income for 2013 = $ 116000
Less : Interest revenue from municipal bonds = $ 30000
Less : Extra Depreciation Expenses allowed ( 10500 -5250) = 5250
Taxable Income = 80750
Income Tax Payable = Taxable Income*tax rate
Income Tax Payable = 80750*35%
Income Tax Payable = $ 28,262.50
Depreciation Expenses is the only timing difference where as interest revenue is permanent difference
Deferred Income Tax = Timming Difference*Tax rate
Deferred Income Tax = 5250*35%
Deferred Income Tax = 1837.50
Income Tax Expenses = Income Tax Payable + Deferred Income Tax
Income Tax Expenses = 28262.50 + 1837.50
Income Tax Expenses =30100
Journal entry
Account Title & Explaination Debit Credit Income Tax Expenses 30,100.00 Deferred Income Tax 1,837.50 Income Tax Payable 28,262.50Related Questions
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