On December 31, 2018, the Lilly Corporation reported a deferred tax liability totaling $12,000, resulting from depreciation temporary differences pertaining to a depreciable asset purchased during 2018. Lilly uses straight-line depreciation over four years for GAAP (book) purposes; for tax purposes, the depreciation deduction is 40% of cost during 2018, 30% of cost during 2019, 20% of cost during 2020, and 10% of cost during 2021. During 2019, Lilly expensed $75,000 of warranty costs that will be deducted for tax purposes in future years. During 2019 Lilly also accrued revenue totaling $150,000 which is taxable in 2020. Lilly's GAAP (book) income before taxes during 2019 totaled $397,700. The marginal income tax rate is 40% for all years.Requirement: Prepare the journal entry to record
income tax expense for the year ended December 31, 2019.
What will be an ideal response?
| December 31, 2019 | Income tax expense | 159,080 | |||
| Deferred tax asset | 30,000 (3) | ||||
| Deferred tax liability | 64,000 (2) | ||||
| Income tax payable | 125,080 [(1) $312,700 × 0.40) |
| GAAP (book) income before taxes | $ | 397,700 | ||
| Excess tax depreciation | (10,000 | )* | ||
| Accrued warranty expense | 75,000 | |||
| Accrued revenue | (150,000 | ) | ||
| Taxable income | $ | 312,700 |
(3) Warranty expense temporary difference ($75,000 × 0.40)
*The $12,000 deferred tax liability at the end of 2018 is the result of multiplying the tax rate times the difference between GAAP (book) depreciation and tax depreciation; therefore, the difference between the two depreciation calculations was $30,000 ($12,000 / 0.40). There was a 15% (40% ? 25%) difference in depreciation rates during 2018, resulting in a depreciation difference of $30,000. The asset's depreciable basis (original cost) was $200,000 ($30,000 / 0.15). The GAAP depreciation expense in 2019 was $50,000 ($200,000 / 4) and tax depreciation during 2019 was $60,000 ($200,000 × 0.30). The difference between the two amounts of depreciation is $10,000.
Business
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