Question

The following information is available for the first four years of operations for Zhao Company:

1.                         Year                            Taxable Income                                 Tax Rate

2020                                       $650,000                                                        19%

2021                                       725,000                                                          21%

2022                                       855,000                                                          21%

2023                                       862,000                                                          21%

2. On January 1, 2020 heavy equipment costing $1,200,000 was purchased. The equipment had a life of 4 years and no salvage value. The straight-line method of depreciation is used for book[1] purposes and the tax depreciation taken each year is listed below:

                                   Tax Depreciation                                         

   2020                     2021                            2022                            2023                                         Total           

$450,000             $425,000                    $175,000                    $150,000                    $1,200,000

3. On January 1, 2020, $580,000 was collected in advance for rental of a building for a four-year period. The entire $580,000 was reported as taxable income in 2020, but $435,000 of the $580,000 was reported as unearned revenue at December 31, 2020 for book purposes.
4. In 2020, the company recognized $80,000 in fine for pollution as an expense on the income statement.
5. In 2021, the company received $40,000 interest on municipal bonds.

Instructions

1. Calculate Pretax Financial Income for 2020 and 2021. (4 points)
2. Prepare the journal entry to record income tax expense, deferred income taxes, and income tax payable for 2020. (3 points)
3. Prepare the journal entry to record income tax expense, deferred income taxes, and income tax payable for 2021. (3 points)
4. Prepare the journal entry to record income tax expense, deferred income taxes, and income tax payable for 2022. (3 points)

[1] Please note: book purposes is same as financial reporting purposes

Answer 1

Solution:-

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