Question

Multiple Tax Rates

For the year ended December 31, 2016, Nelson Co.’s income statement showed income of $435,000 before income, tax expense. To compute taxable income, the following differences were noted:

Income from tax-exempt municipal bonds	$60,000
Depreciation deducted for tax purposes in excess of depreciation recorded on the books	120,000
Proceeds received from life insurance on death of an insured employee	100,000
Corporate tax rate for 2016	30%
Enacted tax rate for future periods	35%

Required:

1.	Calculate taxable income and tax payable for tax purposes.
2.	Prepare Nelson’s income tax journal entry at the end of 2016.

CHART OF ACCOUNTS
Nelson Co
General Ledger
ASSETS 111 Cash 121 Accounts Receivable 141 Inventory 152 Prepaid Insurance 160 Deferred Tax Asset 181 Equipment 198 Accumulated Depreciation LIABILITIES 211 Accounts Payable 231 Salaries Payable 250 Unearned Revenue 260 Deferred Tax Liability 261 Income Taxes Payable EQUITY 311 Common Stock 331 Retained Earnings	REVENUE 411 Sales Revenue EXPENSES 500 Cost of Goods Sold 511 Insurance Expense 512 Utilities Expense 521 Salaries Expense 532 Bad Debt Expense 540 Interest Expense 541 Depreciation Expense 559 Miscellaneous Expenses 910 Income Tax Expense

Calculate taxable income for tax purposes.

Calculate tax payable.

Prepare Nelson’s income tax journal entry at the end of 2016, on December 31.

PAGE 1

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3

Answer 1

Solution:

Question 1:

Particulars	Amount($)
Before tax financial income for the year 2013	435,000
Less:
Income from tax exempt municipal bonds	(60,000)
Depreciation deducted for tax purposes in excess of depreciation recorded on the books	(120,000)
Proceeds received from life insurance on death of an insured employee	(100,000)
Taxable income	155,000

Income tax payable = 155,00 * 30%

= 46,500

Deferred tax asset = 120,000 * 35%

= 42,000

Question 2:

Journal entry for income tax

Date	Particulars	Debit($)	Credit($)
Dec 31, 2016	Income tax expense A/c Dr (46,500 - 42,000)	4,500
	Deferred tax asset Ac Dr	42,000
	To Income tax payable A/c		46,500