Question

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.

Answer 1

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%