Question

Southern Atlantic Distributors began operations in January 2018 and purchased a delivery truck for $40,000. 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 $320,000, which includes interest revenue of $30,000 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 1 G) 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: $ 320 Pretax accounting income Permanent difference Income subject to taxation Temporary difference Income taxable in current year Required 16J >

Answer 1

Statement showing south atlantic income computation as per IRS rules (thousands)

	amount ($)		Tax rate %	tax ($)	RECORDED AS:
pre tax Accounting income	320
Permanent difference	-30
Income subject To taxation	290	*	40	116	116
Temporary difference	-10	*	40	-4	0
Income taxable in current year	280	*	40	112	116

*1 PERMANENT DIFFERENCE ARE THOSE DIFFERENCE WHICH ARE NEVER REVERSED TO BE TAXED IN FUTURE ,INTEREST ON MUNICIPAL BOND IS EXEMPT AS PER IRS PUBLICATION SO , INCOME INCLUDED OF MUNICIPAL BONDS WILL BE DEDUCTED FROM ACCOUNTING INCOME AS ITS INCLUDED IN IT ALREADY ,THIS IS CALLED PERMANENT DIFFERENCE

*2 TEMPORARY DIFFERENCE IS DIFFERENCE CREATED DUE TO CHANGE IN TREATMENT OF BOOK INCOME AND TAXABLE INCOME , HERE DEPRECIATION CHARGED IN BOOKS ARE AS PER STRAIGHT LINE i.e 10000 per year

whereas as per taxable purpose we can claim 50% dep in first year i.e 20000

so this difference in dep of 10000 is temporary difference , its the difference which is delayed for future years to deferred tax , this difference is always get reversed in future

Journal Entries

		Dr($) thousands	cr
1	Tax expense a/c	116
	To deferred Tax liability A/c		4
	To tax payable A/c		112
	( being Income tax deferred for future years)

southern Atlantic net income for 2018 = $280