Question

For the year ended December 31, 2018, Fidelity Engineering reported pretax accounting income of $993,000. Selected information for 2018 from Fidelity's records follows: $35,200 59,800 Interest income on municipal bonds Depreciation claimed on the 2018 tax return 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 2018 93,000 28,400 17,600 Fidelity's income tax rate is 40%. At January 1, 2018, Fidelity's records indicated balances of zero and $13,280 in its deferred tax asset and deferred tax liability accounts, respectively. Required: 1. Determine the amounts necessary to record income taxes for 2018 and prepare the appropriate journal entry. 2. What is Fidelity's 2018 net income? Complete this question by entering your answers in the tabs below. Required 1 Calculation Required 1 G) Required 2 Determine the amounts necessary to record income taxes for 2018. (Enter your answers in thousands rounded to two decimal places (.e. 1,230 should be entered as 1.23). Amounts to be deducted should be indicated with a minus sign.) Tax Rate Tax $ Recorded as: $ 993 00 Pretax accounting income Permanent difference

Answer 1

Deferred taxes originate when amount of tax is paid or has been carried forward but yet to be shown in the income statement. On the other hand, deferred tax liabilities are likely to reverse due to arising of temporary of differences which results in future cash flows when the taxes are paid.

Permanent differences are incapable of reversal unlike temporary differences.

a.

Pretax accounting income (given)	993,000
Less: Permanent difference                municipal interest	35,200
Pretax accounting income subject to income tax	957,800	40%	383,120	Income tax expense
Temporary differences
Depreciation (deferred tax liability as excess of tax basis)	(59,800)	40%	(23,920)	DTL
Warranty income (28,400 – 17,600)	10,800	40%	4320	DTA
Taxable income	908,800	40%	363,520	Income tax payable

Relevant journal entry would be

Date	Particulars	Debit ($)	Credit ($)
	Tax expense (to balance)	383,120
	Deferred tax asset (10,800 *40%)	4,320
	Deferred tax liability (93,000 * 40% - 13,280)		23,920
	Taxes payable (908,800 X 40%)		363,520
	(To record taxes payable)

b.

Computation of net income

Pretax accounting income (given)	993,000
Less: tax expense	383,120
Net income	609,880

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