Shannon Polymers uses straight-line depreciation for financial reporting purpose

Question

Shannon Polymers uses straight-line depreciation for financial reporting purposes for equipment costing $580,000 and with an expected useful life of four 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 $680,000, which includes interest revenue of $14,000 from municipal bonds. Other than the two described, there are no differences between accounting income and taxable income. The enacted tax rate is 35%.

Explanation / Answer

Answer:

Particulars Current Year Future Year Pretax Accounting Income 680000.00 Permanent differences: Muncipal Bond Interest -14000.00 - Temporary Differences: Depreciation Expenses (145,000 - 232,000) -87000.00 87000 Taxable Income 579000.00 Current Tax Liability ($579,000 X 35%) 202650 Deferred tax Liablity ($87000 X 35%) 30450 Journal Entry Particulars Dr. Amt. Cr. Amt. IncomeTax Exp Dr. 233100 To Income Tax payable 202650 To Deferred Tax liability 30450

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