Southern Atlantic Distributors began operations in January 2016 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 50% of cost in 2016, 30% in 2017, and 20% in 2018. Pretax accounting income for 2016 was $300,000, which includes interest revenue of $40,000 from municipal bonds. The enacted tax rate is 40%. Required: Assuming no differences between accounting income and taxable income other than those described above: 1. Prepare the journal entry to record income taxes in 2016. 2. What is Southern Atlantic’s 2016 net income?

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jepessoa jepessoa · Answer 1 · 2020-09-07T02:28:21+02:00

Answer:

1) December 31, 2016, income tax expense

Dr Income tax expense 104,000

Cr Income taxes payable 100,000

Cr Deferred tax liability 4,000

2) net income = $196,000

Explanation:

Southern Atlantic's taxable income = $300,000 (pretax income) - $40,000 (interests on municipal bonds) = $260,000

income tax expense = $260,000 x 40% = $104,000

income taxes payable = $104,000 - deferred tax liability = $104,000 - $4,000 = $100,000

deferred tax liability = accounting depreciation expense x tax rate = ($40,000 x 25%) x 40% = $10,000 x 40% = $4,000

net income = total income - income tax expense = $300,000 - $104,000 = $196,000