Question

North Dakota Corporation began operations in January 2017 and purchased a machine for $25,000. North Dakota uses straight-line depreciation over a four-year period for financial reporting purposes. For tax purposes, the deduction is 40% of cost in 2017, 30% in 2018, and 30% in 2019. Pretax accounting income for 2017 was $155,000, which includes interest revenue of $22,500 from municipal bonds. The enacted tax rate is 30% 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 2017. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

General Journal	Debit	Credit
Income tax expense	39750
Deferred Tax liability		1125	=3750*30%
Income tax payable		38625	=128750*30%

Workings:
Depreciation for tax purposes	10000	=25000*40%
Less: Book Depreciation	6250	=25000/4
Excess tax depreciation	3750
Pretax accounting income	155000
Less: Excess tax depreciation	3750
Less: interest revenue	22500
Taxable income	128750