On January 1, 2018, Ameen Company purchased major pieces of
manufacturing equipment for a total of $114 million. Ameen uses
straight-line depreciation for financial statement reporting and
deducted 100% of the equipment’s cost for income tax reporting in
2018. At December 31, 2020, the book value of the equipment was
$108 million. At December 31, 2021, the book value of the equipment
was $80 million. There were no other temporary differences and no
permanent differences. Pretax accounting income for 2021 was $128
million.
Required:
1. Prepare the appropriate journal entry to record
Ameen’s 2021 income taxes. Assume an income tax rate of 25%.
2. What is Ameen’s 2021 net income?
Ans 1:
Taxable income for 2021 = Pretax accounting income + Excess of book depreciation over tax depreciation
= $128 + [($108 - $80) - 0]
= $156 million
Income tax payable = $156*25% = $39 million
Reversal of deferred tax liability = $28*25% = $7million
*108-80=28
Journal Entries - Ameen Company (In millions) |
|||
Date |
Particulars |
Debit |
Credit |
31-Dec-21 |
Income tax expense Dr |
$32.00 |
|
Deferred tax liability Dr |
$7.00 |
||
To Income taxes Payable ($156*25%) |
$39.00 |
||
(To record income tax and deferred tax for 2021) |
Ans 2:
Net income for 2021 = Pretax income - Income tax expense = $128 - $32 = $96 million
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