Assume the following facts for Munoz Company in 2019. Munoz reported pretax financial income of $800,000. In addition, Munoz reported the following differences between its pretax financial income and taxable income: • Interest income of $60,000 was received during 2019 from an investment in municipal bonds. This income is exempt for tax purposes. • Rent income of $40,000 was collected in 2018 and included for tax purposes during that year. For financial statement purposes, it will be reported as earned equally in 2019 and 2020. • An asset with a 5-year life was purchased during 2019; straight-line depreciation for book purposes was $40,000. MACRS depreciation expense for 2019 was $120,000. • Warranty expense of $20,000 was recognized on the 2019 income statement, while $6,000 was recognized for tax purposes. (Assume a 1-year warranty contract.) The balance of the Deferred Tax Asset account (debit) at January 1, 2019, was $16,000 as a result of the rent income temporary difference. The tax rate for all years was 40%. Munoz has positive verifiable evidence of future taxable income. Required: 1. Calculate the amount of Munoz’s 2019 taxable income. 2. Prepare Munoz’s income tax journal entry at the end of 2019. 3. Calculate Munoz’s effective income tax rate for 2019.

SWFT Comprehensive Volume 2019

42nd Edition

ISBN:9780357233306

Author:Maloney

Publisher:Maloney

Chapter17: Corporations: Introduction And Operating Rules

Section: Chapter Questions

Problem 47P

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Assume the following facts for Munoz Company in 2019. Munoz reported pretax financial income of $800,000. In addition, Munoz reported the following differences between its pretax financial income and taxable income:

•	Interest income of $60,000 was received during 2019 from an investment in municipal bonds. This income is exempt for tax purposes.
•	Rent income of $40,000 was collected in 2018 and included for tax purposes during that year. For financial statement purposes, it will be reported as earned equally in 2019 and 2020.
•	An asset with a 5-year life was purchased during 2019; straight-line depreciation for book purposes was $40,000. MACRS depreciation expense for 2019 was $120,000.
•	Warranty expense of $20,000 was recognized on the 2019 income statement, while $6,000 was recognized for tax purposes. (Assume a 1-year warranty contract.)

The balance of the Deferred Tax Asset account (debit) at January 1, 2019, was $16,000 as a result of the rent income temporary difference. The tax rate for all years was 40%. Munoz has positive verifiable evidence of future taxable income.

Required:

1.	Calculate the amount of Munoz’s 2019 taxable income.
2.	Prepare Munoz’s income tax journal entry at the end of 2019.
3.	Calculate Munoz’s effective income tax rate for 2019.

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