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 50% of cost in 2021, 30% in 2022, and 20% in 2023. Pretax accounting income for 2021 was $200,000, which includes interest revenue of $28,000 from municipal governmental bonds. The enacted tax rate is 25%. Assuming no differences between accounting income and taxable income other than those described above:

1. Dr Income tax expense $43,000

Cr Deferred tax liability $2,500

Cr Income tax payable $40,500

2. $157,000

Explanation:

1. Preparation of the Journal entry to record income taxes in 2021

First step is to record income taxes in 2021

TAX RATE % TAX $ RECORDED AS

Pre-tax accounting income $200,000

Less Permanent difference ($28,000)

Income subject to Taxation

$172,000 ×25% $43,000 Income tax expense

Less Temporary difference

($10,000) ×25% - $2,500 Deferred tax liability

Income taxable in current year

$162,000 ×25% $40,500 Income tax payable

Calculation for Temporary difference

Depreciation in 2021 as per taxation=$40,000×50%

Depreciation in 2021 as per taxation=$20,000

Depreciation as per straight line=$40,000/4

Depreciation as per straight line=$10,000

Using this formula to calculate the Temporary difference

Temporary difference=Depreciation as per straight line-Depreciation in 2021 as per taxation

Let plug in the formula

Temporary difference=$20,000-$10,000

Temporary difference=$10,000

Preparation of Southern Atlantic Distributors JOURNAL ENTRY

Dr Income tax expense $43,000

Cr Deferred tax liability $2,500

Cr Income tax payable $40,500

(Being to record income tax expense)

2. Calculation for Southern Atlantic Distributors Net income

Income before income taxes $200,000

Less Income tax expense

Deferred tax liability ($2,500)

Income tax payable ($40,500)

Net income $157,000

($200,000-$2,500-$40,500)

Therefore 2021 Net income is $157,000

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