Question

On January 1, 2013, Ameen Company purchased a building for $53 million. Ameen uses straight-line depreciation for financial statement reporting and MACRS for income tax reporting. At December 31, 2015, the book value of the building was $30 million and its tax basis was $20 million. At December 31, 2016, the book value of the building was $33 million and its tax basis was $18 million. There were no other temporary differences and no permanent differences. Pretax accounting income for 2016 was $35 million.

1. Prepare the appropriate journal entry to record Ameen’s 2016 income taxes. Assume an income tax rate of 40%. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in millions (i.e., 10,000,000 should be entered as 10).)

What is Ameen’s 2016 net income? (Enter your answers in millions (i.e., 10,000,000 should be entered as 10).)

Answer 1

1. Journal entry to record Ameen’s 2016 income taxes:

General journal	Debit	Credit
Income tax expense	$14
Deferred tax liabilty		$2
Income tax payable		$12

Explanation: Figures in million dollars

	Current year(2016)	Future taxable amount
Pretax accounting income	35
Temporory difference:
Depreciation [(30-20)-(33-18)]	-5	15(33-18)
Taxable income	30
Tax rate	40%	40%
Tax payable currently	12 [30x40%]
Deffered tax liability		6 [15x40%]
Ending balance(balance currently needed)		6
Less:Begining balance(30-20)×40%		(4)
Change needed to achieve desired balance		2

2. Ameen’s 2016 net income:

Pre tax income	$35
Less: Income tax expense	-$14
Net Income	$21