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

Determine the taxable income and income tax payable for the year 2017: Amount $70,000 Particulars Pretax financial income 2017 Excess depreciation Excess rent collected over rent earned Non deductible fines Taxable income ($16,000) $22.000 $11,000 $87,000 $87.000 Taxable income Enacted tax rate Income tax payable 30% $26,100 Therefore, the taxable income is $87,000 and income tax payable is $26,100

Prepare the journal entry to record income tax expense, deferred income taxes and income tax payable for the year 2017: Credit $26.100 Journal Entry Date Accounts title and explanation | Debit Cash $24,300 Deferred tax asset ($22,000x30%) $6,600 Income tax payable Deferred tax liability ($24,300+$6,600-$26.100) (To record the income tax expense, deferred income taxes and income tax payable) $4,800

Determine how the effect of journal entry is represented in the financial statement for the vear 2017: Income Statement (Partial) for the year ended 2017 Particulars Amount Amount Income before income $70,000 taxes Less: Current - Income tax $26.100 expense Deferred -Income tax ($1.800) $24,300 expense Net income / (loss) $45,700 Therefore, the amount of net income is S45,700

Determine the effective tax rate for the year 2017: Tax provision Effective tax rate = Financial Income (GAAP) $24,300 $70,000 = 34.17% Therefore, the effective tax rate is 34.17%