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?

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

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