Question

Sweet Company reports a pretax financial income of $72,600 for 2020. 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 $14,500. 2. Rent collected on the tax return is greater than rent recognized on the income statement by $21,700. 3. Fines for pollution appear as an expense of $11,700 on the income statement. Sweet’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 2020.
a. Compute taxable income and income taxes payable for 2020.
b. Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2020.
c. Prepare the income tax expense section of the income statement for 2020, beginning with the line "Income before income taxes."
d. Compute the effective income tax rate for 2020.

Answer 1

Answer:

A) taxable income = $91500,income tax payable = $27450

d) effective income tax = 28.86%

Explanation:

A) i) taxable income

= pretax financial income + excess rent collected +nondeductible fines -excess depreciation per tax return

= $72600 + $21700 + $11700 - $14500 = $106000 - $14500 = $91500

ii) income taxes payable for 2020

= 30% of taxable income = 30% * 91500 = $27450

B) journal entry for income tax expense, deferred income taxes and income taxes payable for 2020

Income tax expense = debit ( income tax payable - deferred ) $20950

deferred income taxes = debit ( 30% of excess rent collected )  30% of 21700 = $6500

Income taxes payable = credit ( $27450 )

deferred tax liability = credit ( 30% of excess depreciation per tax return ) 30% of $14500 = $4350

C) Income tax expense section of the income statement for 2020

income statement (partial)

income before taxes = $72600

income tax expense current= $27450

income tax expense - differed = $27450 - $6500 = $20950

net income = income before taxes +( income tax expense - differed)

                   = $93550

D) effective income tax

= (income tax expense -differed)/ income before taxes = $20950/72600 = 28.86%