Question

On January 1, 2013, Ameen Company purchased a building for $36 million. Ameen uses straight-line depreciation for financial statement reporting and MACRS for income tax reporting. At December 31, 2017, the book value of the building was $30 million and its tax basis was $20 million. At December 31, 2018, the book value of the building was $28 million and its tax basis was $13 million. There were no other temporary differences and no permanent differences. Pretax accounting income for 2018 was $45 million. Required: 1. Prepare the appropriate journal entry to record Ameen’s 2018 income taxes. Assume an income tax rate of 40%. 2. What is Ameen’s 2018 net income?

Answer 1

Answer:

1.

Dr. Income tax Expense  $22 million

Cr. Income Tax Payable  $16 million

Cr. Deffered tax Liability  $6 million

2.

$18 million

Explanation:

1.

Deffer tax liability arises when the book value of the asset is more than the tax basis of the asset. It means there is more depreciation according to tax implication than the depreciation on book value of assets.

Pretax Income = $45 million

Taxable Depreciation = Depreciation as per tax - Accounting depreciation = ($20-$13 )- ($30 - $28 ) = $5 million

Taxable Income = $45 million  - $5 million = $40 million

Income tax = 40% x $40 million = $16 million

Deffer tax 2018 = ( $28 million - 13 million ) x 40% = $6 million

Total tax = $16 million + 6 million = $22 million

2.

Pretax Income               $45 million

Taxable Depreciation  ($5 million)

Taxable Income            $40 million

Income tax (16+6)        ($22 million)

Net Income                   $18 million