For the year ended December 31, 2021, Fidelity Engineering reported pretax accounting income of $984,000. Selected information for 2021 from Fidelity’s records follows: Interest income on municipal governmental bonds $ 40,000 Depreciation claimed on the 2021 tax return in excess of depreciation on the income statement 64,000 Carrying amount of depreciable assets in excess of their tax basis at year-end 104,000 Warranty expense reported on the income statement 30,000 Actual warranty expenditures in 2021 20,000 Fidelity's income tax rate is 25%. At January 1, 2021, Fidelity's records indicated balances of zero and $10,000 in its deferred tax asset and deferred tax liability accounts, respectively. Required: 1. Determine the amounts necessary to record income taxes for 2021, and prepare the appropriate journal entry. 2. What is Fidelity’s 2021 net income?

Answer and Explanation:

According to the scenario, computation of the given data are as follow:-

1).

ParticularAmount ($)Tax rate                  Tax amount($)

Accounting income$984,000  

Less-Interest income on municipal bond-$40,000  

Income to taxation$944,000$0.25                 $236,000

Less-tax return in excess of depreciation-$64,0000.25$16,000

Warranty expenses($30,000-$20,000)$10,0000.25$2,500

Taxable income$890,0000.25$222,500

Now

Journal Entry

Income tax expense A/c      Dr.$236,000

Deferred  tax asset A/c      Dr.$2500

To Deferred  tax liability A/c  $16,000

To Income tax payable A/c        $222,500  

(Being the income tax  expense for 2021 is recorded )

2 .Net Income of Fidelity = Accounting Income - Income Tax Expense

= $984,000 - $236,000

= $784,000

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