Question

For the year ended December 31, 2021, Fidelity Engineering reported pretax accounting income of $1,012,000. Selected information for 2021 from Fidelity’s records follows:

Interest income on municipal governmental bonds	$	68,000
Depreciation claimed on the 2021 tax return in excess of depreciation on the income statement		92,000
Carrying amount of depreciable assets in excess of their tax basis at year-end		160,000
Warranty expense reported on the income statement		44,000
Actual warranty expenditures in 2021		34,000

Fidelity's income tax rate is 25%. At January 1, 2021, Fidelity's records indicated balances of zero and $17,000 in its deferred tax asset and deferred tax liability accounts, respectively.

Required:
1. Determine the amounts necessary to record income taxes for 2021, and prepare the appropriate journal entry.
2. What is Fidelity’s 2021 net income?

Answer 1

Part 1)

The value of income taxes for 2021 is determined with the use of following table (all values are in 1000s):

	Amount (A)	Tax Rate (B)	Tax Value (A*B)	Recorded As:
Pre-Tax Accounting Income	1012
Permanent Difference:
Interest on Municipal Bonds	-68
Income Subject to Taxation	944	25.00%	236	Income Tax Expense
Temporary Difference:
Depreciation	-92	25.00%	23	Deferred Tax Liability
Warranty Expense (44-34)	10	25.00%	2.5	Deferred Tax Asset
Taxable Income	862	25.00%	215.5	Income Tax Payable

_____

The journal entry is as below:

Event	Account Titles	Debit	Credit
1)	Income Tax Expense	$236
	Deferred Tax Asset	$2.5
	Deferred Tax Liability		$23
	Income Tax Payable		$215.50

_____

Part 2)

The net income is calculated as below (all values are in 1000s):

Pre-Tax Income	1012
Less Income Tax Expense	-236
Net Income	$776