Question

On January 1, 2013, Ameen Company purchased a building for $38 million. Ameen uses straight-line depreciation for financial statement reporting and MACRS for income tax reporting. At December 31, 2017, the book value of the building was $32 million and its tax basis was $22 million. At December 31, 2018, the book value of the building was $30 million and its tax basis was $15 million. There were no other temporary differences and no permanent differences. Pretax accounting income for 2018 was $35 million.

Required:
1. Prepare the appropriate journal entry to record Ameen’s 2018 income taxes. Assume an income tax rate of 40%.
2. What is Ameen’s 2018 net income?

Answer 1

1) income tax expense a/c. Dr. $14

To deferred tac liabilty a/c . $2

To income tax payble. $12

Explanation:

	Current year(2016)	future taxable amount
Pretax accounting income	35
Temporory difference:
Depreciation [(32-22)-(30-15)]	-5	15(30-15)
Taxable income	30
Tax rate	40%	40%
Tax payble currently	12
Deffered tax liability		6
Ending balance(balance currently needed)		6
Less:begining balance(32-22)×40%		(4)
Change needed to achieve desired balance		2

2) answer: $21 million

Explanation:

Pretax income. = $35

Less: income tax expense = ($14)

Net income . = $21