On January 1, 2013, Ameen Company purchased a building for $45 million. Ameen us
ID: 2583884 • Letter: O
Question
On January 1, 2013, Ameen Company purchased a building for $45 million. Ameen uses straight-line depreciation for financial statement reporting and MACRS for income tax reporting. At December 31, 2015, the book value of the building was $39 million and its tax basis was $29 million. At December 31, 2016, the book value of the building was $37 million and its tax basis was $22 million. There were no other temporary differences and no permanent differences. Pretax accounting income for 2016 was $35 million. Required: 1. Prepare the appropriate journal entry to record Ameen’s 2016 income taxes. Assume an income tax rate of 40%. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in millions (i.e., 10,000,000 should be entered as 10).) 2. What is Ameen’s 2016 net income? (Enter your answers in millions (i.e., 10,000,000 should be entered as 10).)
Explanation / Answer
$ in Millions
Pretax accounting income = 35
Less:Excess Depreciation as per tax = (5)
Taxable Income = 30
Income tax for the year = 30 * 40%
= 12
As per Deferred Tax Accounting, for the year 2016, Deferred Tax Liability would be arised, since the book value of the building is more than its tax basis which means, the depreciation under tax is more than the depreciation as per books and thus the profit as per books would be less as per income tax compared to the profit as per books.
Deferred Tax Expense for the year 2015 = (37 - 22) * 40%
= 15 * 40%
= 6
Income Tax Expense = 12 + 6
= 18.
Journal Entry:
Income Tax Expense A/c Dr 18
To Income Tax Payable 12
To Deferred Tax Liability 6
2. Net Income of Ameen in 2016
Accounting Income of Ameen = 35
Less: Total Tax Expense = (18)
Net Income of Ameen in 2016 = 17
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