On 1/1/13, Shannon Polymers purchased equipment costing $600,000. For financial

Question

On 1/1/13, Shannon Polymers purchased equipment costing $600,000. For financial reporting purposes, the company uses straight-line depreciation with an expected useful life of 3 years and no residual value. For tax purposes, the deduction is 50%, 30%, and 20% in those years, respectively. Pretax accounting income was $500,000, $600,000, and $550,000 for 2013, 2014, and 2015, respectively, and the enacted tax rate is 40%. 1. Determine whether the difference creates a temporary/permanent difference. 2. Determine whether any temporary differences create a DTA/DTL. 3. Prepare the tax-related journal entry for 2013. 4. Prepare the tax-related journal entry for 2014. 5. Prepare the tax-related journal entry for 2015.

Explanation / Answer

Answer 1 & 2)

Answer 3, 4 & 5)

Journal Entry:

2013:

Debit Tax Expense $120000

Credit Tax Payable $80000

Credit Deferred Tax Liability $40000

2014

Debit Tax Expense $160000

Debit Deferred Tax Liability $ 8000

Credit Tax Payable $168000

2015

Debit Tax Expense $140000

Debit Deferred Tax Liability $ 32000

Credit Tax Payable $172000

Year / Details 2013-Depreciation 2013- Tax payable 2014-Depreciation 2014- Tax payable 2015-Depreciation 2015- Tax payable Total tax paid in three years Depreciation as per books 200000 200000 200000 Tax as per Books 120000 160000 140000 420000 Depreciation for Taxation 300000 180000 120000 Tax as per Books 80000 168000 172000 420000 Temporary difference-Deferred Tax Liability -40000 +8000 +32000 0

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