Question

Zekany Corporation would have had identical income before taxes on both its income tax returns and income statements for the years 2018 through 2021 except for differences in depreciation on an operational asset. The asset cost $200,000 and is depreciated for income tax purposes in the following amounts:

2018	$	66,000
2019		88,000
2020		30,000
2021		16,000

  
The operational asset has a four-year life and no residual value. The straight-line method is used for financial reporting purposes.
  
Income amounts before depreciation expense and income taxes for each of the four years were as follows.
   

	2018			2019			2020			2021
Accounting income before taxes and depreciation	$	110,000		$	130,000		$	120,000		$	120,000

  
Assume the average and marginal income tax rate for 2018 and 2019 was 30%; however, during 2019 tax legislation was passed to raise the tax rate to 40% beginning in 2020. The 40% rate remained in effect through the years 2020 and 2021. Both the accounting and income tax periods end December 31.
   
Required:
Prepare the journal entries to record income taxes for the years 2018 through 2021. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Solution:

Computation of Taxable Income and Income Tax Payable
Particulars	2018	2019	2020	2021
Accounting income before taxes and depreciation	$110,000.00	$130,000.00	$120,000.00	$120,000.00
Less: Depreciation as per Income tax	$66,000.00	$88,000.00	$30,000.00	$16,000.00
Taxable Income	$44,000.00	$42,000.00	$90,000.00	$104,000.00
Income Tax Payable	$13,200.00	$12,600.00	$36,000.00	$41,600.00

Computation of Deferred Tax
Particulars	2018	2019	2020	2021
Depreciation as per Income Tax	$66,000.00	$88,000.00	$30,000.00	$16,000.00
Depreciation as per Books	$50,000.00	$50,000.00	$50,000.00	$50,000.00
Taxable Temporary differences	$16,000.00	$38,000.00	$0.00	$0.00
Reversible Temporary differences			$20,000.00	$34,000.00
Deferred tax liability to be recorded 2018 - $16,000*30% 2022 - ($38,000*40% + $16,000*10%)	$4,800.00	$16,800.00	$0.00	$0.00
Reversal of Deferred tax liability			$8,000.00	$13,600.00

Journal Entries - Zekany Corporation
Year	Particulars	Debit	Credit
2018	Income Tax Expense Dr	$18,000.00
	To Income tax Payable		$13,200.00
	To Deferred tax liability		$4,800.00
	(To record income tax and deferred tax for 2021)
2019	Income Tax Expense Dr	$29,400.00
	To Income tax Payable		$12,600.00
	To Deferred tax liability		$16,800.00
	(To record income tax and deferred tax for 2022)
2020	Income Tax Expense Dr	$28,000.00
	Deferred tax liability Dr	$8,000.00
	To Income tax Payable		$36,000.00
	(To record income tax and deferred tax for 2023)
2021	Income Tax Expense Dr	$28,000.00
	Deferred tax liability Dr	$13,600.00
	To Income tax Payable		$41,600.00
	(To record income tax and deferred tax for 2024)