Question

Shannon Polymers uses straight-line depreciation for financial reporting purposes for equipment costing $640,000 and with an expected useful life of four years and no residual value. Assume that, for tax purposes, the deduction is 40%, 30%, 20%, and 10% in those years. Pretax accounting income the first year the equipment was used was $740,000, which includes interest revenue of $17,000 from municipal governmental bonds. Other than the two described, there are no differences between accounting income and taxable income. The enacted tax rate is 25%.

Prepare the journal entry to record income taxes.

Answer 1

Journal entry

Particulars	Debit ($)	Credit ($)
Income tax expense	180750
To Income tax payable		156750
To deferred income tax		24000

Working note:

Particulars	Current year	Future year
Pretax accounting income	$740000
Less: Interest revenue	($17000)
Less: Depreciation post tax [($640000 / 4 years) X (1-40%)]	($96000)	$96000
Taxable income	$627000	$96000
Enacted tax rate	25%	25%
Income tax payable ($627000 X 25%)	$156750
Deferred tax liability		$24000