Question

The following information has been obtained for Martinez Corporation. Prior to 2020, taxable income and pretax financial income were identical. 1. 2. Pretax financial income is $1,747,000 in 2020 and $1,434,000 in 2021. On January 1, 2020, equipment costing $1,304,000 is purchased. It is to be depreciated on a straight-line basis over 5 years for tax purposes and over 8 years for financial reporting purposes. (Hint: Use the half-year convention for tax purposes, as discussed in Appendix 11A.) Interest of $54,000 was earned on tax-exempt municipal obligations in 2021. 5. 3. 4. Included in 2021 pretax financial income is a gain on discontinued operations of $195,000, which is fully taxable. The tax rate is 20% for all periods. Taxable income is expected in all future years. 6. 7. Compute taxable income and income taxes payable for 2021. Taxable income 24 Income taxes payable

Answer 1

A. Computation of Taxable Income and Income Tax Payable for 2021

	Particulars	Amount
	Pre-tax financial income	1,434,000
Add	Dep as per Books (1304000 / 8 years)	163,000
Less	Dep as per IT (1304000 / 5 years)	-260,800
Less	Exempt Interest Income municipal obligations	-54,000
	Taxable Income	1,282,200
	Income Tax Payable @ 20%	256,440

B. Journal Entry to record 2021 income tax expense, income tax payable and deferred taxes

Income Tax as per Pre-tax financial Income (1,434,000*20%)	286,800
Income Tax as per Taxable Income (1,282,200*20%)	256,440

Here, Pre-tax financial income is higher than Taxable income. So, it will create deferred tax liability.

Because in accounts, we have to book Income tax as per Pre-tax financial income and we pay Income tax as per Taxable Income. So balance is deferred tax liability, which we need to pay in future.

Account Titles & Explanation	Debit	Credit
Income Tax Expense	286,800
Income Tax Payable		256,440
Deferred Tax Liability		30,360

C. Income Statement

Martinex Corporation
Income Statement (Partial)
For the Year December 31, 2021
Income from Continuing operations before income taxes	1,434,000
Income Tax	-286,800
Income from continuing Operations (I)	1,147,200
Discontinued Operations (II)
Gain on discontinued Operations	195,000
Net Income ( III = I + II )	1,342,200

D. Balance Sheet

Martinex Corporation
Balance Sheet (Partial)
December 31,2021
Non-current Liabilities
Deferred Tax Liability	30,360