Question

Southern Atlantic Distributors began operations in January 2021 and purchased a delivery truck for $40,000. Southern Atlantic plans to use straight-line depreciation over a four-year expected useful life for financial reporting purposes. For tax purposes, the deduction is 45% of cost in 2021, 30% in 2022, and 25% in 2023. Pretax accounting income for 2021 was $460,000, which includes interest revenue of $68,000 from municipal governmental bonds. The enacted tax rate is 25%.

Assuming no differences between accounting income and taxable income other than those described above:
Required:
1. Complete the following table given below and prepare the journal entry to record income taxes in 2021.
2. What is Southern Atlantic’s 2021 net income?

Answer 1

1. Depreciation as per books = Cost of purchase/Useful life

Depreciation as per books = $40,000/4

Depreciation as per books = $10,000

Depreciation as per tax for 2021 = Cost of purchase * Deduction rate

Depreciation as per tax for 2021 = $40,000 * 45%

Depreciation as per tax for 2021 = $18,000

Temporary difference = $18,000 - $10,000

Temporary difference = $8,000

Particulars Amount Tax Rate Tax Recorded as

Pretax accounting income $460,000

Permanent difference -$68,000

Income subject to taxation $392.00 25% $98,000 Income tax expense

Temporary difference -$8,000 25% -$2,000 Deferred tax liability

Income taxable in $384,000 25% $96,000 Income tax payable

current year

Journal Entries - Southern Atlantic Distributors

Date Particulars and Explanation Debit Credit

Income tax expense $98,000

To Income taxes payable $96,000

To Deferred tax liability $2,000

(To record income tax expense)

2. Net income for 2021 = Pretax income - Income tax expense

Net income for 2021 = $460,000 - $98,000

Net income for 2021 = $362,000