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Complete the work sheet. In completing the worksheet, compute State of Illinois corporate income taxes at 4.5% of pretax income. The state income tax is deductible on the federal tax return, and the federal tax is not deductible on the Illinois return. Assume federal corporate income tax on income subject to federal tax is as follows: First $50,000 @15% Next $25,000 @25% Remainder @34%. Income between $100,000 and $335,000 is assessed a 5% federal surtax, not to exceed $11,750. Federal income tax must be paid throughout the year via estimated tax payments, recorded as a debit to Income Tax Expense and a credit to Cash. To determine taxable income at year-end, net the total debits and credits from the income statement in the worksheet, ensuring that the estimated income tax expense (listed as a debit) is subtracted from total debits since it is not deductible on the federal return. Prepare the journal entry for income taxes. The pretax income is $254,608 and the estimated income tax expense throughout the year is $72,000. Calculations show a federal income tax of $74,817 and a state income tax of $11,457.

Paper For Above instruction

In accounting, accruing and recording income tax liabilities accurately are essential components of financial statement preparation, especially for corporations operating across multiple jurisdictions, such as federal and state tax authorities. The process involves determining taxable income, calculating tax liabilities based on applicable rates, and recognizing tax expenses and payables in the accounting records. This paper discusses the detailed procedures for computing federal and state income taxes, the impact of estimated payments throughout the year, and correctly journalizing the income tax expense and payable in accordance with Generally Accepted Accounting Principles (GAAP).

Calculation of Federal Income Tax

The gross pretax income provided is $254,608. Federal income tax rates are progressive, with the initial $50,000 taxed at 15%, the subsequent $25,000 at 25%, and the remaining income at 34%. Additionally, income between $100,000 and $335,000 is subject to a 5% surtax, with a maximum of $11,750. The stepwise calculation begins by applying each tax rate to the respective income segments. This approach ensures precise tax liability determination, incorporating the latest tax brackets and surtax rules.

1. Calculate tax for the first $50,000 at 15%: $50,000 x 0.15 = $7,500.
2. Calculate tax for the next $25,000 at 25%: $25,000 x 0.25 = $6,250.
3. Remaining income is $254,608 - $75,000 = $179,608, which is taxed at 34%: $179,608 x 0.34 = $61,067.
4. Sum the taxes before surtax: $7,500 + $6,250 + $61,067 = $74,817.
5. Apply the 5% surtax if applicable. Since the income is within the range, and the surtax is capped at $11,750, calculate the surtax: 5% of taxable income up to the cap. The total surtax is $11,457, as provided, which is below the maximum cap, thus the total federal tax liability is $74,817.

The federal tax liability, therefore, amounts to $74,817, considering the surtax cap and rates.

Calculation of State Income Tax

The Illinois corporate income tax rate is 4.5%. Therefore, the state income tax liability is calculated as 4.5% of pretax income:

$254,608 x 0.045 = $11,457.

Federal estimated payments of $72,000 have been made throughout the year. Since estimated tax payments are recorded as a debit to Income Tax Expense and a credit to Cash, the remaining income tax payable at year-end must be calculated by comparing the total estimated payments with the actual tax owed.

Journal Entry for Income Taxes

At year-end, the corporation must recognize the income tax expense and the liability for the taxes payable. The journal entry is structured as follows:

• Debit Income Tax Expense: the total income tax expense calculated, which includes both federal and state taxes, adjusted for estimated payments.
• Credit Income Taxes Payable: the total amount owed to tax authorities for the current fiscal year, corresponding to the actual tax liabilities minus the payments made.

Given the calculations:

• Federal income tax: $74,817
• State income tax: $11,457
• Total tax expense before estimated payments: $74,817 + $11,457 = $86,274

Since $72,000 has already been paid through estimated payments, the remaining amount to be accrued is:

$86,274 - $72,000 = $14,274

Therefore, the journal entry at year-end would be:

This entry recognizes the total income tax expense for the year and the additional amount owed to tax authorities beyond the estimated payments already made.

Conclusion

Proper calculation and recording of income taxes are critical in ensuring financial statement accuracy. The process involves calculating federal and state tax liabilities based on applicable rates and income brackets, adjusting for estimated payments, and recording the remaining payable at year-end. This approach enhances compliance with accounting standards and provides transparent financial reporting for stakeholders. Accurate journal entries facilitate better cash flow management and tax planning for corporations.

References

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• United States Department of the Treasury. (2023). Internal Revenue Service Publication 538. IRS.
• Illinois Department of Revenue. (2022). Illinois Corporate Income Tax Guide. Illinois.gov.
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