Question

Shetland Inc. had pretax financial income of \(154,000 in 2017. Included in the computation of that amount is insurance expense of \)4,000 which is not deductible for tax purposes. In addition, depreciation for tax purposes exceeds accounting depreciation by $10,000. Prepare Shetland’s journal entry to record 2017 taxes, assuming a tax rate of 45%.

Short answer

Depreciation is a term used in accountswhere the value of fixed assets the organization owns decreases because of its usage. It is charged as an expense and is deductedfrom theasset's actual value.

Step-by-step solution

Computation of income tax payable and deferred tax liability

$\begin{array}{rcl}\mathrm{Income}\mathrm{tax}\mathrm{payable}& =& (\mathrm{Financial}\mathrm{Income}+\mathrm{Insurance}\mathrm{expence}-\mathrm{Accounting}\mathrm{depreciation})\times \mathrm{Tax}\mathrm{rate}\\ & =& (\$154,000+\$4,000-\$10,000)\times 45\%\\ & =& \$148,000\times 45\%\\ & =& \$66,600\end{array}$

$\begin{array}{rcl}\mathrm{Deferred}\mathrm{Tax}\mathrm{liability}& =& \mathrm{Accounting}\mathrm{depreciation}\times \mathrm{Tax}\mathrm{rate}\\ & =& \$10,000\times 45\%\\ & =& \$4,500\end{array}$

Journal entry

Shetland Inc.
Journal Entry
Date	Particulars	Debit	Credit
2017	Income tax expense	$71,100
	Income tax payable		$66,600
	Deferred tax liability		$4,500
	(To record the income tax expense)