Question

On January 1, 2018, Ameen Company purchased major pieces of manufacturing equipment for a total of $42 million. Ameen uses straight-line depreciation for financial statement reporting and MACRS for income tax reporting. At December 31, 2020, the book value of the equipment was $36 million and its tax basis was $26 million. At December 31, 2021, the book value of the equipment was $34 million and its tax basis was $19 million. There were no other temporary differences and no permanent differences. Pretax accounting income for 2021 was $50 million.

Required:
1. Prepare the appropriate journal entry to record Ameen’s 2021 income taxes. Assume an income tax rate of 25%.
2. What is Ameen’s 2021 net income?

Answer 1

Depreciation as per MACRS	7	=26-19
Depreciation as per books	2	=36-34
Excess Depreciation	5
1
General Journal	Debit	Credit
Income tax expense	12.50
Deferred tax liability		1.25	=5*25%
Income tax payable		11.25	=(50-5)*25%
2
Pretax accounting income	50.0
Less: Income tax expense	12.5
Net income	37.5	million