Question

Exercise 19-4

Tamarisk Company reports pretax financial income of $72,600 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 $14,500.
2.		Rent collected on the tax return is greater than rent recognized on the income statement by $21,700.
3.		Fines for pollution appear as an expense of $11,700 on the income statement.

Tamarisk’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.

(A) Compute taxable income and income taxes payable for 2017.

Taxable Income $__________

Income Taxes Payable $___________

Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2017. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Account Titles and Explanation	Debit	Credit

(C) Prepare the income tax expense section of the income statement for 2017, beginning with the line “Income before income taxes.” (Enter loss using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

	Tamarisk Company
	Income Statement (Partial)
???		$
?????
????	$
???	$
		$
????		$

(D) Compute the effective income tax rate for 2017. (Round answer to 1 decimal places, e.g. 25.5%.)
Effective Income Tax Rate _____%

Answer 1

Solution A:

Computation of Taxable Income and Income tax payable - Tamarisk Inc.
For year ended 2017
Particulars	Amount
Pretax financial income	$72,600.00
Permanent differences:
Fines for pollution violation	$11,700.00
Temporary differences:
Extra depreciation for tax over book depreication	-$14,500.00
Rent collected on the tax return is greater than rent recognized on the income statement	$21,700.00
Taxable Income	$91,500.00
Income tax payable ($91,500*30%)	$27,450.00

Solution B:

Journal Entries - Tamarisk Inc.
Date	Particulars	Debit	Credit
31-Dec-17	Income tax expense Dr	$25,290.00
	Deferred tax assets Dr ($21,700*30%)	$6,510.00
	To Income taxes payable		$27,450.00
	To Deferred tax liability ($14,500*30%)		$4,350.00
	(To record income tax and deferred tax for the year)

Solution c:

Tamarisk company
Income Statement (Partial)
For year ended December 31, 2017
Particulars		Amount
Income before taxes		$72,600.00
Less: Income tax expense:
Current Tax	$27,450.00
Deferred tax ($4,350 - $6,510)	-$2,160.00
		$25,290.00
Net Income		$47,310.00

Solution D:

Effective Income Tax Rate = Income tax expense / Pre tax income = $25,290 / $72,600 = 34.83%