Question

Southern Atlantic Distributors began operations in January 2018 and purchased a delivery truck for $40,000. Southern Atlantic plans to use straight-line depreciation over a four-year expected useful life for financial reporting purposes. For tax purposes, the deduction is 50% of cost in 2018, 30% in 2019, and 20% in 2020. Pretax accounting income for 2018 was $280,000, which includes interest revenue of $40,000 from municipal bonds. The enacted tax rate is 30%.
Assuming no differences between accounting income and taxable income other than those described above:

Required:
1. Complete the following table given below and prepare the journal entry to record income taxes in 2018.
2. What is Southern Atlantic’s 2018 net income?

Answer 1

Answer:Please refer to the explanation section

Explanation:

The question is incomplete the Table that the first question refers to is not provided in the question, However having dealt with such questions in the past, I will assume the first question requires us to calculate differed tax and Process a journal entry.

1. Differed Tax arises as a result of temporary differences between accounting principles and Tax Laws. Southern Atlantic Distributors plans to depreciate the delivery truck over a period of 4 years while The receiver of tax revenue (Tax authority) plans to deduct 50% in the first year 2018, 30% in the second year 2019 and 20% third year.

Tax base = Book value of the asset based on Tax laws Deduction Policies

Carrying Value = Book Value of an asset based on accounting policies

Tax Base 2018. 50% is deducted in the first year. Therefore

Tax Base 2018 = $40 000 x 50/100 = $20000

Tax Base 2018 (Book value using tax laws) = $20 000 (40 000 - 20000)

Carrying Value = $40 000 - $40000/4 = $40 000 - $10000 = $30000

Differed tax Liability = $20000 - $30000 = -$10 000 x 30/100 = -$3000

Journal Entry

Dr Income Tax Expense  $3000

Cr            Differed Tax Liability   $3000

2. Southern Atlantic net income

Pretax income = $280 000

Income = $280 000 x 30/100 = $84000

Total Income tax for 2018 = $84000 + $3000 = $87000

Net income = $280 000 - $87000 = $193000