On January 1, 2011 ACME Company purchased a building for $45million. ACME deprec

Question

On January 1, 2011 ACME Company purchased a building for $45million. ACME depreciates the building using straight line for financial accounting and uses MACRS for its tax return.   On December 31, 2014 ACME’s building had a book value of $36 million and a tax basis of $20million. On December 31, 2015 ACME’s building had a book value of $33million and a tax basis of $16million. ACME has no other temporary or permanent differences, and is in a 30% tax bracket. In 2015, ACME shows income before income taxes of $7million.

Make the journal entry ACME makes for income taxes

What is ACME’s income after taxes.

Explanation / Answer

Timing difference:

2015. Book value 33 million

            Tax basis          16 million

   Timing difference : (33- 16) 17

DEFERD TAX LIABI

Tax rate           : 30 %

Timing difference        17 million

defered tax liability   17 * 30 %   = 5.1 million

    TOTAL TAX AND JOURNAL ENTRY

Tax on current income    : 7 million * 30 %      =   2.1 million

Defered tax liability         :                                     5.1 million

Journal Entry

current Tax expense                     7.2 million

              To Income tax payable                                2.1 million

               To defered tax liability                                 5.1 million

             ( Being tax expense and liability for the

                       year including defered tax are accounted)

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