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Zurich Company reports pretax financial income of \(70,000 for 2017. The following items cause taxable income to be different than pretax financial income. 1. Depreciation on the tax return is greater than depreciation on the income statement by \)16,000. 2. Rent collected on the tax return is greater than rent recognized on the income statement by \(22,000. 3. Fines for pollution appear as an expense of \)11,000 on the income statement. Zurich鈥檚 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 2017. Instructions (a) Compute taxable income and income taxes payable for 2017. (b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2017. (c) Prepare the income tax expense section of the income statement for 2017, beginning with the line 鈥淚ncome before income taxes.鈥� (d) Compute the effective income tax rate for 2017.

Step by step solution

01

(a) Computation of taxable income and income taxes payable for 2017.

Particulars	Amount
Pretax financial income	$70,000
Less: Excess depreciation	$16,000
Add: Rent collected	$22,000
Add: Nondeductible fines	$11,000
Taxable income	$87,000
Multiply: Tax rate	30%
Income taxes payable	$26,100

02

Computation of Deferred tax asset/liability and the income tax expense for the year 2017.

Temporary difference	Taxable amount	Tax rate	Deferred tax asset	Deferred tax liability
Depreciation	$16,000	30%		$4,800
Unearned rent	($22,000)	30%	($6,600)
Total			($6,600)	$4,800

Particulars	Amount
Deferred tax expense for 2017	$4,800
Add: Deferred tax benefit	($6,600)
Net deferred tax benefit	($1,800)
Add: Current tax expense	$26,100
Income tax expense for 2017	$24,300

03

(b) Journal entry

Date	Particulars	Debit	Credit
2017	Income tax expense	$24,300
	Deferred tax asset	$6,600
	Income tax payable		$26,100
	Deferred tax liability		$4,800
	(To record the income tax expense)

04

(c) Income statement

Income Statement
Particulars		Amount
Income before income taxes		$70,000
Less: Income tax expense
Current tax expense	$26,100
Deferred tax expense	($1,800)	$24,300
Net Income		$45,700

05

(d) Computation of the effective tax rate for 2017

$\begin{array}{rcl}\mathbf{Effective}\mathbf{}\mathbf{tax}\mathbf{}\mathbf{rate}& \mathbf{=}& \frac{\mathbf{Income}\mathbf{}\mathbf{tax}\mathbf{}\mathbf{expense}}{\mathbf{Income}\mathbf{}\mathbf{before}\mathbf{}\mathbf{income}\mathbf{}\mathbf{taxes}}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{24}\mathbf{,}\mathbf{300}}{\mathbf{\$}\mathbf{70}\mathbf{,}\mathbf{000}}\\ & \mathbf{=}& \mathbf{34}\mathbf{.}\mathbf{71}\mathbf{\%}\end{array}$

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