Chapter 18, Problem 8P

1 (a)

To determine

Prepare a schedule that shows MACRS depreciation from 2016 through 2019.

Explanation of Solution

Prepare a schedule that shows MACRS depreciation from 2016 through 2019:

Year	MACRS Depreciation rate	MACRS Depreciation (Tax purpose)
	(1)	$\left(2\right)=\left(1\right)\times \$60,000$
2016	33.33%	$19,998
2017	44.45%	$26,670
2018	14.81%	$8,886
2019	7.41%	$4,446

Table (1)

1 (b)

To determine

Prepare a schedule that shows straight line depreciation from 2016 through 2019.

Explanation of Solution

Straight-line Depreciation: Under the straight-line method of depreciation, the same amount of depreciation is allocated every year over the estimated useful life of an asset. The formula to calculate the depreciation cost of the asset using the residual value is shown as below:

$\text{Depreciation cost = }\frac{\left(\text{Cost of the asset}-\text{Residual value}\right)}{\text{Estimated useful life of the asset}}$

Prepare a schedule that shows straight line depreciation from 2016 through 2019.

Given, the cost of the asset is $60,000 and the estimated useful life is 4 years. So, the straight line depreciation is $15,000 $\left(\frac{\$60,000}{4\text{ years}}\right)$ for each year.

Year	Straight line Depreciation    (Financial reporting  purpose)
2016	$15,000
2017	$15,000
2018	$15,000
2019	$15,000

Table (2)

1 (c)

To determine

Prepare a schedule that shows the annual depreciation temporary difference from 2016 through 2019.

Explanation of Solution

Temporary Difference: Temporary difference refers to the difference of one income recognized by the tax rules and accounting rules of a company in different periods. Consequently the difference between the amount of assets and liabilities reported in the financial reports and the amount of assets and liabilities as per the company’s tax records is known as temporary difference.

Prepare a schedule that shows the annual depreciation temporary difference from 2016 through 2019:

Year	MACRS Depreciation (Tax purpose)	Straight line Depreciation    (Financial reporting  purpose)	Temporary difference between annual depreciation
2016	$19,998	$15,000	$4,998
2017	$26,670	$15,000	$11,670
2018	$8,886	$15,000	($6,114)
2019	$4,446	$15,000	($10,554)

Table (3)

Note: The temporary difference of annual depreciation is calculated by subtracting MACRS depreciation (Requirement 1 (a)) and straight line depreciation (Requirement 1 (b)).

1 (d)

To determine

Prepare a schedule that shows the accumulated temporary difference from 2016 through 2019.

Explanation of Solution

Prepare a schedule that shows the accumulated temporary difference from 2016 through 2019:

Year	Temporary difference between annual depreciation	Accumulated Temporary difference
2016	$4,998	$4,998
2017	$11,670	$16,668
2018	($6,114)	$10,554
2019	($10,554)	$0

Table (4)

Note: The accumulated temporary difference is determined by adding the temporary difference of annual depreciation of each of the year from 2016 through 2019.

2 (a)

To determine

Record the income tax journal entry at the end of 2016 for Company C.

Explanation of Solution

Record the income tax journal entry at the end of 2016 for Company C.

Date	Account title and Explanation	Post ref.	Amount
			Debit	Credit
2016
December 31	Income tax expense (1)		$7,499
	Income tax payable (2)			$6,000
	Deferred tax liability (3)			$1,449
	(To record the income tax payable )

Table (5)

• Income tax expense is an expense that decreases the stockholder’s equity and it is increased. Thus, it is debited.
• Income tax Payable is a liability and it is increased. Thus, it is credited.
• Deferred tax liability is a liability and it is increased. Thus, it is credited.

Working note 1: Determine the income tax expense:

$\begin{array}{c}\text{Income tax expense}=\text{Income tax payable}+\text{Deferred tax liability}\\ \text{=\$6,000}+\$1,499\\ \text{=\$7,499}\end{array}$

Working note 2: Determine the income tax payable:

Given, the taxable income is $20,000 and the tax rate is 30%.

$\begin{array}{c}\text{Income tax payable}=\text{Taxable income}\times \text{Corporate tax rate}\\ \text{=\$20,000}\times \text{30\%}\\ \text{=\$6,000}\end{array}$

Working note 3: Determine the deferred tax liability:

Given, the accumulated temporary difference is $4,998 for year 2016 as computed in Table (4) and the tax rate is 30%.

$\begin{array}{c}\text{Deferred tax liability}=\text{Future taxable amount}\times \text{Tax rate}\\ \text{=\$4,998}\times 30\%\\ =\$1,499\text{(rounded off)}\end{array}$

2 (b)

To determine

Record the income tax journal entry at the end of 2017 for Company C.

Explanation of Solution

Record the income tax journal entry at the end of 2017 for Company C.

Date	Account title and Explanation	Post ref.	Amount
			Debit	Credit
2017
December 31	Income tax expense (4)		$11,601
	Income tax payable (5)			$8,100
	Deferred tax liability (6)			$3,501
	(To record the income tax payable )

Table (6)

• Income tax expense is an expense that decreases the stockholder’s equity and it is increased. Thus, it is debited.
• Income tax Payable is a liability and it is increased. Thus, it is credited.
• Deferred tax liability is a liability and it is increased. Thus, it is credited.

Working note 4: Determine the income tax expense:

$\begin{array}{c}\text{Income tax expense}=\text{Income tax payable}+\text{Deferred tax liability}\\ \text{=\$8,100}+\$3,501\\ \text{=\$11,601}\end{array}$

Working note 5: Determine the income tax payable:

Given, the taxable income is $27,000 and the tax rate is 30%.

$\begin{array}{c}\text{Income tax payable}=\text{Taxable income}\times \text{Corporate tax rate}\\ \text{=\$27,000}\times \text{30\%}\\ \text{=\$8,100}\end{array}$

Working note 6: Determine the deferred tax liability:

Given, the accumulated temporary difference is $16,668 for year 2017 as computed in Table (4) and the tax rate is 30%.

$\begin{array}{c}\text{Deferred tax liability}=\left[\left(\begin{array}{l}\text{Future taxable}\\ \text{ amount}\end{array}\right)\times \text{Tax rate}\right]-\left(\begin{array}{l}\text{Beginning deferred }\\ \text{tax liability}\end{array}\right)\\ \text{=}\left(\text{\$16,668}\times 30\%\right)-\$1,499\\ =\$5,000\text{ (rounded off)}-\$1,499\\ =\$3,501\end{array}$

2 (c)

To determine

Record the income tax journal entry at the end of 2018 for Company C.

Explanation of Solution

Record the income tax journal entry at the end of 2018 for Company C.

Date	Account title and Explanation	Post ref.	Amount
			Debit	Credit
2018
December 31	Income tax expense (balancing figure)		$8,366
	Deferred tax liability (7)		$1,834
	Income tax payable (8)			$10,200
	(To record the income tax payable )

Table (7)

• Income tax expense is an expense that decreases the stockholder’s equity and it is increased. Thus, it is debited.
• Deferred tax liability is a liability and it is decreased. Thus, it is debited.
• Income tax Payable is a liability and it is increased. Thus, it is credited.

Working note 7: Determine the deferred tax liability:

Given, the accumulated temporary difference is $10,554 for year 2018 as computed in Table (4) and the tax rate is 30%.

$\begin{array}{c}\text{Deferred tax liability}=\left[\left(\begin{array}{l}\text{Future taxable}\\ \text{ amount}\end{array}\right)\times \text{Tax rate}\right]-\left(\begin{array}{l}\text{Beginning deferred }\\ \text{tax liability}\end{array}\right)\\ \text{=}\left(\text{\$10,554}\times 30\%\right)-\$3,501\left(\text{From 2020}\right)\\ =\$3,166\text{ (rounded off)}-\$3,501\\ =\left(\$1,834\right)\text{ Decrease in deferred tax laibility}\end{array}$

Working note 8: Determine the income tax payable:

Given, the taxable income is $34,000 and the tax rate is 30%.

$\begin{array}{c}\text{Income tax payable}=\text{Taxable income}\times \text{Corporate tax rate}\\ \text{=\$34,000}\times \text{30\%}\\ \text{=\$10,200}\end{array}$

2 (d)

To determine

Record the income tax journal entry at the end of 2019 for Company C.

Explanation of Solution

Record the income tax journal entry at the end of 2019 for Company C.

Date	Account title and Explanation	Post ref.	Amount
			Debit	Credit
2019
December 31	Income tax expense (balancing figure)		$8,834
	Deferred tax liability (9)		$3,166
	Income tax payable (10)			$12,000
	(To record the income tax payable )

Table (8)

• Income tax expense is an expense that decreases the stockholder’s equity and it is increased. Thus, it is debited.
• Deferred tax liability is a liability and it is decreased. Thus, it is debited.
• Income tax Payable is a liability and it is increased. Thus, it is credited.

Working note 9: Determine the deferred tax liability:

Given, the accumulated temporary difference is $0 for year 2019 as computed in Table (4) and the tax rate is 30%.

$\begin{array}{c}\text{Deferred tax liability}=\left[\left(\begin{array}{l}\text{Future taxable}\\ \text{ amount}\end{array}\right)\times \text{Tax rate}\right]-\left(\begin{array}{l}\text{Deferred tax }\\ \text{liability of all years}\end{array}\right)\\ \text{=}\left(\text{\$0}\times 30\%\right)-\left[\$1,499-\$3,501+\$1,834\left(\text{debit}\right)\right]\\ =\$0-\$3,166\\ =\$3,166\left(\text{Decrease in deferred tax liability}\right)\end{array}$

Working note 10: Determine the income tax payable:

Given, the taxable income is $40,000 and the tax rate is 30%.

$\begin{array}{c}\text{Income tax payable}=\text{Taxable income}\times \text{Corporate tax rate}\\ \text{=\$40,000}\times \text{30\%}\\ \text{=\$12,000}\end{array}$

3 (a)

To determine

Prepare the lower portion of Company G’s income statement.

Explanation of Solution

Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

Prepare the lower portion of Company G’s income statement:

Company G
Income Statement
For the year ended 2016
Pretax Operating Income	$24,998
Less: Income tax expense	($7,499)
Net Income	$17,499

Table (9)

Thus, the net income of Company G is $17,499.

3 (b)

To determine

Prepare the lower portion of Company G’s income statement.

Explanation of Solution

Prepare the lower portion of Company G’s income statement:

Company G
Income Statement
For the year ended 2017
Pretax Operating Income	$38,670
Less: Income tax expense	($11,601)
Net Income	$27,069

Table (10)

Thus, the net income of Company G is $27,069.

3 (c)

To determine

Prepare the lower portion of Company G’s income statement.

Explanation of Solution

Prepare the lower portion of Company G’s income statement:

Company G
Income Statement
For the year ended 2018
Pretax Operating Income	$27,886
Less: Income tax expense	($8,366)
Net Income	$19,520

Table (11)

Thus, the net income of Company G is $19,520.

3 (d)

To determine

Prepare the lower portion of Company G’s income statement.

Explanation of Solution

Prepare the lower portion of Company G’s income statement:

Company G
Income Statement
For the year ended 2019
Pretax Operating Income	$29,446
Less: Income tax expense	($8,834)
Net Income	$20,612

Table (12)

Thus, the net income of Company G is $20,612.