On January 1, 2011 ACME Company purchased a building for $45million. ACME deprec

Question

On January 1, 2011 ACME Company purchased a building for $45million. ACME depreciates the building using straight line for financial accounting and uses MACRS for its tax return. On December 31, 2014 ACME’s building had a book value of $36 million and a tax basis of $20million. On December 31, 2015 ACME’s building had a book value of $33million and a tax basis of $16million. ACME has no other temporary or permanent differences, and is in a 30% tax bracket. In 2015, ACME shows income before income taxes of $7million. Make the journal entry ACME makes for income taxes? What is ACME’s income after taxes?

Please show calculations

Explanation / Answer

Depreciation Expenses as per Financial accounting in 2015 = December 31, 2014 ACME’s building had a book value - December 31, 2014 ACME’s building had a book value

Depreciation Expenses as per Financial accounting in 2015 = 36-33

Depreciation Expenses as per Financial accounting in 2015 = $ 3 Million

Depreciation Expenses in tax return in 2015 = December 31, 2014 ACME’s building had a tax basis - December 31, 2014 ACME’s building had a tax basis

Depreciation Expenses in tax return in 2015 = 20-16

Depreciation Expenses in tax return in 2015 = $ 4 Million

Temporary difference due to Depreciation Expense = 4 - 3 = $ 1 Million

Income before income taxes as per Financial Accounting = $ 7 Million

Add : Depreciation Expenses as per Financial accounting in 2015 = $ 3 Million

Less : Depreciation Expenses in tax return in 2015 = $ 4 Million

Taxable Income = $ 6 Million

Income tax payable = Taxable Income *Tax rate

Income tax payable = 6*30%

Income tax payable = $ 1.80 Million

Deffered Tax Liability to be created = Temporary difference due to Depreciation Expense * tax rate

Deffered Tax Liability to be created = 1 * 30%

Deffered Tax Liability to be created = $ 0.30 Million

Income Tax Expenses = Income tax payable + Deffered Tax Liability to be created

Income Tax Expenses = 1.80 + 0.30

Income Tax Expenses = $ 2.10 Million

Journal entry ACME makes for income taxes

ACME’s income after taxes = ACME income before income taxes - Income Tax Expenses

ACME’s income after taxes = 7 - 2.1

ACME’s income after taxes = $ 4.90 Million

Account Title & Explaination Debit Credit Income Tax Expenses 2.1 Deffered Tax Liability 0.3 Income tax payable 1.8

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