Question

Southern Atlantic Distributors began operations in January 2021 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 45% of cost in 2021, 30% in 2022, and 25% in 2023. Pretax accounting income for 2021 was $460,000, which includes interest revenue of $68,000 from municipal governmental bonds. The enacted tax rate is 25%.

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 2021.

2. What is Southern Atlantic’s 2021 net income?

Answer 1

solution 1:

Depreciation as per books = $40,000/4 = $10,000

Depreciation as per tax for 2021 = $40,000 * 45% = $18,000

Temporary difference = $18,000 - $10,000 = $8,000

Particulars	Amount (In '000)	Rate of Tax	Tax	Recorded as
Pretax accounting income	$460.00
Permanent difference	-$68.00
Income subject to taxation	$392.00	25%	$98.00	Income tax expense
Temporary difference	-$8.00	25%	-$2.00	Deferred tax liability
Income taxable in current year	$384.00	25%	$96.00	Income tax payable

Journal Entries - Southern Atlantic Distributers (in'000)
Event	Particulars	Debit	Credit
1	Income tax expense Dr	$98.00
	To Income taxes payable		$96.00
	To Deferred tax liability		$2.00
	(To record income tax expense)

Solution 2:

Net income for 2021 = Pretax income - Income tax expense = $460,000 - $98,000 = $362,000