Question

Alvis Corporation reports pretax accounting income of $520,000, but due to a single temporary difference, taxable income is only $340,000. At the beginning of the year, no temporary differences existed.

Required:
1. Assuming a tax rate of 25%, what will be Alvis’s net income?
2. What will Alvis report in the balance sheet pertaining to income taxes?

Balance Sheet Account Reported Amount

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?

	Tax Rate % Tax $ Recorded as: Pretax accounting income $460,000 Permanent difference Income subject to taxation $460,000 x Temporary difference x = Income taxable in current year $460,000 x =

Answer 1

1st question:

1)

Income tax expense (to balance)	130000
Deferred tax liability (520000-340000)*25%		45000
Income tax payable (340000*25%)		85000

Pretax accounting income	520000
Income tax expense	130000
Net income	380000

2) Alvis will report the $45,000 deferred tax liability among either its current or long-term liabilities depending on the cause of the temporary difference and the $85,000 income tax payable as a current liability.

2nd question:

1)

		Tax rate	Tax	Recorded as
Pretax accounting income	460000
Permanent differences	68000
Income subject to taxation	392000	25%	98000
Temporary diff. (68000/4)	17000	25%	4250	deferred tax liability
Income taxable in the current year	375000	25%	93750	Income tax payable

Journal entry:

Date	Particulars	Debit ($)	Credit ($)
	Income tax expenses	98000
	Deferred tax liability		4250
	Income tax payable		93750

2)

Pretax income	460000
Income tax expenses	-98000
Net income	362000