Question

On January 1, 2018, Ameen Company purchased major pieces of manufacturing equipment for a total of $108 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 $102 million. At December 31, 2021, the book value of the equipment was $76 million. There were no other temporary differences and no permanent differences. Pretax accounting income for 2021 was $122 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?

Answer 1

The asset recorded full depreciation as per Income tax purposes during the first year of purchase. Hence, there exists a deferred tax liability balance which was created in the first year. Subsequently, when the asset is depreciated as per Straight line method for accounting purposes, the deferred tax liability shall be reduced every year. in $ millions Book Value of Equipment as on December 31, 2020 102 (-) Book Value of Equipment as on December 31, 2021 -76 Temporary Difference Deferred Tax (26*25%) 6.5 122 26 Pre-tax Accounting Income (+) Temporary Difference Taxable income Current Tax 148 (148*25%)

Requirement 1 Year end Particulars 31-Dec-21 Income Summary Deferred Tax Current Tax (To record income tax and deferred tax) (in $ millions) Debit Credit 30.50 6.50 37.00 37.00 31-Dec-21 Current Tax Income Tax Payable (To record income tax due for 2018) 37.00 6.50 31-Dec-21 Deferred Tax Liability Deferred Tax (To record reduction of Deferred tax liability) 50 Requirement 2 Pre-tax Accounting Income (-) Current Tax (+) Deferred tax Net Income in $ millions 122.00 -37.00 6.50 91.50 Ameen's 2021 net income is $ 91.50 millions.