Question

1.Southern Atlantic Distributors began operations in January 2018 and purchased a delivery truck for $40,000.Southern Atlantic plans to use straight-line depreciation over a four-year expected useful life for financial reporting purposes. For tax purposes, the deduction is 50% of cost in 2018, 30% in 2019, and 20% in 2020. Pretax accounting income for 2018 was $300,000, which includes interest revenue of $40,000 from municipal bonds.

The enacted tax rate is 40%.

Required:

Assuming no differences between accounting income and taxable income other than those described above:

1. Prepare the journal entry to record income taxes in 2018.

2. What is Southern Atlantic’s 2018 net income?

Answer 1

1.

Date	Account Titles and Explanation	Debit	Credit
2018	Income tax expense	104000
	Deferred tax liability		4000
	Income tax payable		100000
	(To record income taxes)

Working:

Pretax accounting income	300000
Permanent difference-Municipal bonds interest	-40000
	260000
Temporary difference-Depreciation*	-10000
Taxable income	250000
Tax rate	40%
Income tax payable (40% x $250000)	100000
Deferred tax liability (40% x $10000)	4000
*Depreciation:
Tax depreciation ($50% x $40000)	20000
Book depreciation ($40000/4)	10000
Temporary difference $	10000

2. Net income = Pretax accounting income - Income tax expense

Net income = $300000 - $104000 = $196000