Question

For the year ended December 31, 2021, Fidelity Engineering reported pretax accounting income of $1,040,000. Selected information for 2021 from Fidelity's records follows: Interest income on municipal governmental bonds Depreciation claimed on the 2021 tax return in excess rn in excess of depreciation on the income statement Carrying amount of depreciable assets in excess of their tax basis at year-end Warranty expense reported on the income statement Actual warranty expenditures in 2021 $ 96,080 120,000 216,000 58,000 48,000 Fidelity's income tax rate is 25%. At January 1, 2021, Fidelity's records indicated balances of zero and $24,000 in its deferred tax asset and deferred tax liability accounts, respectively, Required: 1. Determine the amounts necessary to record income taxes for 2021, and prepare the appropriate journal entry. 2. What is Fidelity's 2021 net income? Complete this question by entering your answers in the tabs below. Required 1 Calculation Required 1 GJ Required 2 Determine the amounts necessary to record income taxes for 2021. (Enter your answers in thousands rounded to 1 decimal place. Amounts to be deducted should be indicated with a minus sign.) Tax Rate % Tax Recorded as: $ 1,040 Pretax accounting income Permanent difference $ 1,040 x Income subject to taxation Temporary difference Depreciation

Answer 1

Req1.

Determine the amount necessary to record income taxes for 2021 as follows:

			Tax rate		Tax ($)	Recorded as:
Pretax accounting income	$1,040
Permanent difference:
Interest on municipal bonds	($96)
Income subject to taxation ($1040-$96)	$944	×	25%	=	$236	Income tax expense
Temporary difference:
Depreciation	($120)	×	25%	=	($30)	Deferred tax liability
Warranty expense ($58,000 - $48,000)	$10	×	25%	=	$3	Deferred tax assets
Taxable income	$834	×	25%	=	$209	Income tax payable

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Prepare jouranl entries as follows:

Requirement 1 Journal Entries Particulars Deferred tax (P&L) (WN1) To Deferred tax liability Dr Cr Deferred tax Assets To Deferred tax (P&L) (WN2) 208.5 P&L A/C (WN3) To Provision for income tax 208.5 Requirement 2 Feidlity net income 2021 Net Profit before tax (Given) Tax expenses (WN3) Net Income 1040 208.5 831.5 Amount WN 1 - Permanent difference Closing Deferred tax liability Opening Balance Deferred tax liability * * Expense allowed for dedution in income tax is higher than the expense booked in P&L A/C, which will lead to lower dedution in Income tax compared to P&L. Therefore Deferred tax Liability WN 2 - Temporary difference Warrenty expenses booked in P&L Actual warrenty expenses Deferred tax assets * * Expenses allowed for deduction lesser than the actual, which will be later allowed on actual payment basis. Therefore Deferred tax assets Amount 1040 WN 3 - Income tax Computation of taxable income Net profit before tax Add: Warrenty expenses booked in P&L Total Less: Interest Income on municipal govt bonds Excess depreciation in income tax Actual warrenty expense Total Adjusted Income for tax purpose Tax @ 25% 96 120 264 834 208.5

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Compute net income as follows:

	Amount
Pre-Tax Income	$1,040
Less: Income tax expense	($236)
Net Income	$804

Answer 2

Requirement 1 Journal Entries Particulars Deferred tax (P&L) (WN1) To Deferred tax liability Dr Cr Deferred tax Assets To Deferred tax (P&L) (WN2) 208.5 P&L A/C (WN3) To Provision for income tax 208.5 Requirement 2 Feidlity net income 2021 Net Profit before tax (Given) Tax expenses (WN3) Net Income 1040 208.5 831.5 Amount WN 1 - Permanent difference Closing Deferred tax liability Opening Balance Deferred tax liability * * Expense allowed for dedution in income tax is higher than the expense booked in P&L A/C, which will lead to lower dedution in Income tax compared to P&L. Therefore Deferred tax Liability WN 2 - Temporary difference Warrenty expenses booked in P&L Actual warrenty expenses Deferred tax assets * * Expenses allowed for deduction lesser than the actual, which will be later allowed on actual payment basis. Therefore Deferred tax assets Amount 1040 WN 3 - Income tax Computation of taxable income Net profit before tax Add: Warrenty expenses booked in P&L Total Less: Interest Income on municipal govt bonds Excess depreciation in income tax Actual warrenty expense Total Adjusted Income for tax purpose Tax @ 25% 96 120 264 834 208.5