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Shannon Polymers uses straight-line depreciation for financial reporting purposes for equipment costing $700,000 and with an expected...

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Accounting

Shannon Polymers uses straight-line depreciation for financialreporting purposes for equipment costing $700,000 and with anexpected useful life of four years and no residual value. Assumethat, for tax purposes, the deduction is 40%, 30%, 20%, and 10% inthose years. Pretax accounting income the first year the equipmentwas used was $800,000, which includes interest revenue of $21,000from municipal governmental bonds. Other than the two described,there are no differences between accounting income and taxableincome. The enacted tax rate is 25%. Prepare the journal entry torecord income taxes. (If no entry is required for atransaction/event, select "No journal entry required" in the firstaccount field.)

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--Required journal entry

Accounts title Debit Credit
Income Tax Expense $194,750
   Deferred Tax Liability $26,250
   Income Tax Payable $168,500
(Income taxes recorded)

--Workings

Working Straight Line Depreciation Depreciation as per Income tax Temporary Difference
A Original Cost $700,000 $700,000
B Life (years) 4
C = A/B Accounting depreciation $175,000
D = A x 40% in Year 1 Income tax depreciation allowed $280,000
Total Depreciation expense $175,000 $280,000 $105,000
Tax Rate Tax $ Recorded as:
Pretax accounting income $800,000
Permanent Difference ($21,000)
Income Subject to taxation $779,000 25% $194,750 Income tax expense
Temporary Difference ($105,000) 25% ($26,250) Deferred Tax Liability
Income taxable in current year $674,000 25% $168,500 Income Tax Payable

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