Shannon Polymers uses straight-line depreciation for financial reporting purpose

Question

Shannon Polymers uses straight-line depreciation for financial reporting purposes for equipment costing $560,000 and with an expected useful life of 4 years and no residual value. For tax purposes, the deduction is 40%, 30%, 20%, and 10% in those years. Pretax accounting income the first year the equipment was used was $660,000, which includes interest revenue of $13,000 from municipal bonds. Other than the two described, there are no differences between accounting income and taxable income. The enacted tax rate is 30%.
   
Prepare the journal entry to record income taxes.

Explanation / Answer

Solution:

Computation of Taxable Income and Income Tax and deferred tax Liability - Shannon Polymers Particulars Amount Pre Tax Accounting Income $660,000.00 Add: Depreciation as per books $560,000/4 $140,000.00 Less: Depreciation as per income tax $560,000*40% $224,000.00 Less: Interest revenue on mucipal bonds $13,000.00 Taxable Income $563,000.00 Tax Rate 30% Income Tax Liability $168,900.00 Temporary difference resulting in future taxable amount $84,000.00 Deferred Tax Liability $25,200.00

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