Question

1. Southern Corporation began operations in January 2019 and purchased a machine for $120,000 at that time. Southern uses straight-line depreciation over a four-year period for financial reporting purposes. For tax purposes, the deduction is 50% of cost in 2019, 30% in 2020, and 20% in 2021. Pretax accounting income for 2019 – which is the FIRST year of using this machine – is $170,000.  The enacted tax rate is 30% for all years. There are no other differences between accounting and taxable income.

Prepare the journal entry for 2019:

Answer 1

JOURNAL ENTRY:

Debit    credit

Jan 2019 Machinery 120,000

Cash 120,000

(To record purchase of machinery)

Dec 2019 Depreciation expense 30000

Accumulated depreciation 30000

( Depreciation by SLM= 120,000/4= 30,000 recorded)

Dec 2019 Income tax expense 42000

Income tax payable   33000

Deferred tax liability 9000

Income for taxes under financial accounting rule is Pre- tax income - depreciation by SLM

170,000-30000= 140000

Income Tax obligation=30% on 140000 = 42000

Taxable income on which taxes has to be paid is  Pre- tax income - depreciation by Tax deduction

170,000- (120,000*50% i.e 60000) = 110,000

Income tax payable=30% on 110000= 33000

Difference between Tax payable and Tax obligation will be deferred tax liability i.e 42000-33000= 9000

*Deferred tax liability is recognized in current period for taxes payable in future periods.