Question

E19-4 (L01,2) (Three Differences, Compute Taxable income, Entry for Taxes) Zurich Company reports pretax financial income of $70,000 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 $16,000. 2. Rent collected on the tax return is greater than rent recognized on the income stalement by $22,000. 3. Fines for pollution appear as an expense of $11,000 on the income statement Zurich's tax rate is 30% 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. Instructions (a) Compute taxable income and income taxes payable for 2017. (b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2017. (0) Prepare the income tax expense section of the income statement for 2017, beginning with the line "Income before income taxes." (d) Compute the effective income tax rate for 2017.

Answer 1

a
Pretax financial income for 2017	$ 70,000
Excess depreciation pre tax return	$ -16,000
Excess rent collected over rent earned	$ 22,000
Non deductible fines	$ 11,000
Taxable income	$ 87,000
Taxable income	$ 87,000
Tax rate	$           0
Income tax payable	$ 26,100
b
Account Title and Explanation	Debit	Credit
Income tax expense	$ 24,300
Deferred tax asset (22000*30%)	$    6,600
Income tax payable		$ 26,100
Deferred tax liability (16000*30%)		$   4,800
c. Income statement (Partial)
Income before income taxes		$ 70,000
Income tax expense - Current	$ 26,100
Income tax expense - Deferred	$   -1,800	$ 24,300
Net income		$ 45,700
Effective Tax rate (24300/70000)	35%