Question

South Texas Luxury Apartments reports pretax financial income of $68,400 for 2017. The following items cause taxable income to be different than pretax financial income. 1. Depreciation on the tax return is greater than depreciation on the income statement by $17,000. 2. Rent collected on the tax return is greater than rent recognized on the income statement by $21,000. 3. Fines for pollution appear as an expense of $10,300 on the income statement. South Texas Luxury Apartment's tax rate is 40% for all years, and the company expects to report taxable income in all future years. There are no deferred taxes at the beginning of 2017. 1. Compute taxable income and income taxes payable for 2017. 2. Prepare the journal entry in good form to record income tax expense, deferred income taxes, and income taxes payable for 2017. 3. Prepare the income tax expense section of the income statement for 2017, beginning with the line "Income before income taxes." 4. Compute the effective income tax rate for 2017.

Answer 1

1. Computation of Taxable Income & Tax Payable
Pretax Financial Income	68,400
Less: Excess Depreciation as per tax Return	(17,000)
Add: Rent received but Not Recognised	21,000
Add: Disallowance of Fines Expenses	10,300
Taxable Income	82,700
Tax Rate	40%
Income Tax Payable	33,080

2. Journal Entry- Deferred Tax
Date	Account Tittle	Debit	Credit
31-Dec	Income Tax Expense (bf)	31,480
	Deferred tax Assets ( 21000*40%)	8,400
	Deferred Tax Liability (17000*40%)		6,800
	Income tax payable		33,080

Partial - Income Statement - Income Tax Expense Section
Income before Income tax	$68,400.00
Less: Income Tax Expense
Current Tax	$33,080.00
Deferred Tax expense(8400-6800)	-$1,600.00	$31,480.00
Income after income tax	$36,920.00

Computation of Effective Tax Rate

Effective Tax Rate= Income Tax Expense/ Income Before Tax

=31480/68400= 46.02%

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