Question

You have a company with a 21% tax rate, a depreciable asset of $90,000, depreciated on a straightline basis for accounting purposes that you are able to depreciate entirely in the first year for accounting purposes. In each of the 3 years you have, respectively, profits of $120,000, $140,000 and $160,000. Determine: 1. Accounting depreciation 2. Tax depreciation 3. Temporary differences 4. Taxable income 5. Tax payable 6. Tax deferred {At your choice you may also include tax expense in the table} while you are not required to create a table it is recommended. 420 90 7. Provide journal entries for the tax expense in each year. 1 23T Accg profit 120 140 160 ACCE dep L 30 30 30 Tax dep -90 Temp diff -60 30 30 Taxable income 60 170 190 Tax payable 35.7 39.9 Tax deferred 12.6 6.3 6.3 -90 420 12.6 Tax expense 25.2 33.6 29.4 6.3 DTL 12.6 6.3 N Tax payable 35.7 39.9

Answer 1

Year 2 Year 3 Year 1 Accounting Profit Add:Accounting Depreciation A Less: Tax Depreciation $120,000 $140,000 $160,000 30,000 30,000 $30,000 It is mentioned in the question as "that you are able to depreciate entirely in the first year for accounting purposes" and not for tax purposes. However, I have assumed it to be a typo error and the asset is depreciated entirely for tax purposes in the first year and not for accounting purposes. $(90,000) Taxable income 60,000 $170,000 $190,000 C 21% Tax rate 21% 21% D Tax Payable Temporary Difference (DTL)/DTA 12,600 35,700 39,900 E F-A+B $ (60,000) 30,000 $30,000 (12,600) 6,300 $6,300 D*F

Journal Entry Year 1 $ 25,200 $ 25,200 $ 12,600 (12,600) $ 12,600 $(12,600) Таx expense To Tax Payable To DTL Year 2 $ 35,700 35,700 $(35,700) Тах expense 35,700 To Tax Payable $ 6,300 $6,300 DTL $6,300 $(6,300) То Tаx expense Year 3 Tax expense $ 39,900 39,900 To Tax Payable 39,900 $(39,900) $ 6,300 $6,300 DTL То Таx expense $ 6,300 $(6,300)