Question

# Waterway Company reports pretax financial income of \$76,500 for 2020. The following items cause taxable income...

Waterway Company reports pretax financial income of \$76,500 for 2020. The following items cause taxable income to be different than pretax financial income.

 1 Depreciation on the tax return is greater than depreciation on the income statement by \$15,700. 2 Rent collected on the tax return is greater than rent recognized on the income statement by \$23,400. 3 Fines for pollution appear as an expense of \$10,500 on the income statement.

Waterway’s tax rate is 30% for all years, and the company expects to report taxable income in all future years. There are no deferred taxes at the beginning of 2020.

Compute taxable income and income taxes payable for 2020.

Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2020.

Prepare the income tax expense section of the income statement for 2020, beginning with the line “Income before income taxes.”

Compute the effective income tax rate for 2020.

1) Solution:

 Taxable income 64,700 Income taxes payable 28,410

Working:

 Pretax financial income 76,500 Excess depreciation per tax return -15,700 Excess rent collected over rent earned 23,400 Nondeductible fines 10,500 Taxable income 94,700 Taxable income 94,700 Enacted tax rate 30% Income taxes payable 28410

2)

 Particulars Debit Credit Income Tax Expense 26,100 Deferred Tax Asset (23,400 * 30%) 7,020 Income taxes payable 28,410 Deferred Tax Liability (15,700 * 30%) 4,710

3)

 Income Statement (Partial) Income before income taxes 76,500 Income tax expense -Current 28,410 Income tax expense -Deferred -2,310 26,100 Net income / (loss) 50,400

4) Effective income tax rate = 26,100 / 76,500 = 34.12%

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