As
the new accountant for Carly’s Pet Express Inc., a line of pet boutiques, you
are developing the financial statement disclosures for the 2011 financial
statement note on Income Taxes. The company uses PE GAAP, and has selected the
taxes payable method. The statutory tax rate is currently 38%. During 2011, net
income before taxes was $185,000. CCA exceeded depreciation expense by $25,000.
The only permanent difference was the non-deductible portion of meals and
entertainment costs, 50% of $20,000.
Instructions
(a)
Determine the income tax expense to be recorded using the taxes payable method
and record the necessary journal entry.
(b)
Prepare the reconciliation of actual tax rate to the statutory rate as required
for inclusion in the financial statement note on Income Taxes.
(a)
|
Accounting income before adjustments
|
$185,000
|
|
Add: 50% meals and entertainment
|
10,000
|
|
Less: CCA in excess of depreciation
|
(25,000)
|
|
Taxable income
|
$170,000
|
|
Income tax expense @ 38%
|
$64,600
|
Current
Income Tax Expense............................................. 64,600
Income
Tax payable................................................... 64,600
(b)
|
Effective Tax Rate = $64,600/$185,000
|
34.9%
|
|
Adjustment for permanent differences
= ($10,000 x
38%)/$185,000
|
(2.0%)
|
|
Adjustment for reversing differences
= ($25,000 x 38%)/$185,000
|
5.1%
|
|
Statutory Tax Rate
|
38.0%
|
