Question

Southern Atlantic Distributors began operations in January 2018 and purchased a delivery truck for $80,000. Southern Atlantic plans to use straight-line depreciation over a four-year expected useful life for financial reporting purposes. For tax purposes, the deduction is 50% of cost in 2018, 30% in 2019, and 20% in 2020. Pretax accounting income for 2018 was $420,000, which includes interest revenue of $55,000 from municipal bonds. The enacted tax rate is 40%. Assuming no differences between accounting income and taxable income other than those described above: Required: 1. Complete the following table given below and prepare the journal entry to record income taxes in 2018. 2. What is Southern Atlantic's 2018 net income? Complete this question by entering your answers in the tabs below. Required 1 Calculation Required 1G) Required 2 Complete the following table given below to record income taxes in 2018. (Enter your answers in thousands. Amounts to be deducted should be indicated with a minus sign.) Tax Rate % Tax $ Recorded as: Pretax accounting income Permanent difference Income subject to taxation Temporary difference Income taxable in current year Required 10J >

Answer 1

Note: All the answers are entered in thousands

B C D E F Tax rate % Tax $ Recorded as A i 1) 2 3 Pretax accounting income 4 Permanent differences 5 Income subject to taxation $ 6 Temproary difference 7 Income taxable in current year $ 420 -55 365 x -20 X 345 x 40% = $ 40% = $ 40% = $ 146 Income tax expense -8 Deferred tax liability 138 Income tax payable

B C D E F G i 1) 2 Tax rate % Tax $ Recorded as 3 Pretax accounting income 420 4 Permanent differences -55 5 Income subject to taxation =+B3+B4 6 Temproary difference -20 7 Income taxable in current year =+35+B6 X =+B5*D5 Income tax expense =+B6*D6 Deferred tax liability =+F5+F6 Income tax payable 0.4

Working Note: Depreciation as per straight line = $80,000/4 Depreciation as per straight line = $20,000 Depreciation for 2021 as per taxation = $80,000*50% Depreciation for 2021 as per taxation = $40,000 Temporary difference = $40,000-$20,000 Temporary difference = $20,000 Transaction Credit 146 General Journal Debit Income tax expense $ Deferred tax liability Income taxes payable (To record the income taxes for 2018) $ $ 8 138 Net income = $420 - $146 Net income = $274