Question

For the year ended December 31, 2021, Fidelity Engineering reported pretax accounting income of $1,008,000. Selected information for 2021 from Fidelity’s records follows:

Interest income on municipal governmental bonds	$	64,000
Depreciation claimed on the 2021 tax return in excess of depreciation on the income statement		88,000
Carrying amount of depreciable assets in excess of their tax basis at year-end		152,000
Warranty expense reported on the income statement		42,000
Actual warranty expenditures in 2021		32,000

Fidelity's income tax rate is 25%. At January 1, 2021, Fidelity's records indicated balances of zero and $16,000 in its deferred tax asset and deferred tax liability accounts, respectively.

Required:
1. Determine the amounts necessary to record income taxes for 2021, and prepare the appropriate journal entry.
2. What is Fidelity’s 2021 net income?
  

Answer 1

Required 1)

	Amount ($)	Tax rate (%)	Tax ($)	Recorded as
Pretax accounting income	1,008,000
Permanent difference
Interest on municipal bonds	64,000
Interest subject to taxation	9,44,000	25%	236,000	Income tax expense
Temporary diffrence
Depreciation	-88,000	25%	-22,000	Deferred tax liability
Warranty Expense	10,000	25%	2,500	Deferred tax asset
Taxable Income	866,000	25%	216,500	Income tax payable

Warranty expense = $42,000 - $32,000 = $10,000

JOURNAL ENTRY:

Event General Journal Debit($) Credit($)

1 Income Tax Expense Dr. 236,000

Deferred Tax Assets Dr.    2,500

Deferred Tax Laibaility    22,000

Income Tax Payable 216,500

{NOTE: Deferred Tax Liability = [(25% * $152,000) - $16,000] = $22,000}

Required 2)

Fidelity's 2021 Net Income = Pretax accounting income - Tax expense

= $1,008,000 - $236,000

= $772,000