Question

North Dakota Corporation began operations in January 2020 and purchased a machine for $27,000. North Dakota uses straight-line depreciation over a four-year period for financial reporting purposes. For tax purposes, the deduction is 50% of cost in 2020, 20% in 2021, and 30% in 2022. Pretax accounting income for 2020 was $157,000, which includes interest revenue of $23,500 from municipal bonds. The enacted tax rate is 30% for all years. There are no other differences between accounting and taxable income. Required: Prepare a journal entry to record income taxes for the year 2020. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Answer and Explanation:

The Journal entry is shown below:-

Income tax expense Dr, $40,025

      To Deferred tax liability $2,025

      To Income tax payable $38,025

(Being income taxes for the year 2020 is recorded)

Working note:-

Excess depreciation = ($27,000 × 50%) - ($27,000 ÷ 4)

= $13,500 - $6,750

= $6,750

For Deferred tax liability = $6,750 × 30%

= $2,025

For Income tax payable = ($157,000 - $23,500 - $6,750) × 30%

= $126,750 × 30%

= $38,025