Question

For the year ended December 31, 2021, Fidelity Engineering reported pretax accounting income of $978,000. Selected information for 2021 from Fidelity’s records follows: Interest income on municipal governmental bonds $ 32,000 Depreciation claimed on the 2021 tax return in excess of depreciation on the income statement 58,000 Carrying amount of depreciable assets in excess of their tax basis at year-end 88,000 Warranty expense reported on the income statement 26,000 Actual warranty expenditures in 2021 10,000 Fidelity's income tax rate is 25%. At January 1, 2021, Fidelity's records indicated balances of zero and $7,500 in its deferred tax asset and deferred tax liability accounts, respectively. Required: 1. Determine the amounts necessary to record income taxes for 2021, and prepare the appropriate journal entry. 2. What is Fidelity’s 2021 net income?

Answer 1

Answer:

1. Income tax payable for 2021 = (Pretax accounting income - Interest income on municipal governmental bonds - Depreciation + (Warranty expense reported - Actual Warranty) ) * Income Tax rate

= (978,000 - 32,000 - 58,000 + (26,000 - 10,000)) * 25%

= $226,000

Income tax expense for 2021 = (Pretax Income - Interest income on municipal governmental bonds) * 25%

= (978,000 - 32,000) * 25%

= $236,500

Deferred tax asset - Warranty

=  (Warranty expense reported - Actual Warranty) * Income Tax rate

= (26,000 - 10,000)) * 25%

= $4,000

Deferred Tax liability

= Depreciation * Income Tax rate

= 58,000 * 25%

= $14,500

Journal entry

DR Income Tax Expense                                            $236,500

     Deferred Tax Asset                                               $4,000

CR Income Tax Payable                                                                  $226,000

     Differed Tax liability                                                                  $14.50

2. Net Income

= Pretax Accounting Income - Income tax expense

= 978,000 - 236,500

= $741,500