Wilson Corporation began operations in January 2008, and purchased a machine for $20,000. Wilson uses straight-line depreciation over a four-year period for financial reporting purposes. For tax purposes, the deduction is 50% of cost in 2008, 30% in 2009, and 20% in 2010. Pretax accounting income for 2008 was $150,000, which includes interest revenue of $20,000 from municipal bonds. The enacted tax rate is 30% for all years. There are no other differences between accounting and taxable income.
To find the taxable income for Wilson Corporation, we need to calculate the depreciation expense and adjust the accounting income for tax purposes.
1. Depreciation Expense Calculation:
Since Wilson Corporation uses straight-line depreciation over a four-year period, we can divide the machine's cost of $20,000 by four years to find the annual depreciation expense. This gives us an annual depreciation expense of $5,000.
2. Adjusting Accounting Income for Tax Purposes:
To find the adjusted accounting income for tax purposes, we need to make the following adjustments:
a) Deduct the depreciation expense: Since the depreciation expense is tax-deductible, we subtract $5,000 from the pretax accounting income.
$150,000 - $5,000 = $145,000
b) Add back the interest revenue from municipal bonds: Municipal bond interest is tax-exempt, so we need to add it back to the adjusted accounting income.
$145,000 + $20,000 = $165,000
3. Calculating Taxable Income:
To calculate taxable income, we need to apply the tax rates to the adjusted accounting income for each year:
2008: Since the deduction is 50% of cost, the taxable income for 2008 is 50% of $165,000.
Taxable Income in 2008 = $165,000 * 50% = $82,500
2009: The deduction is 30% of cost, so the taxable income for 2009 is 30% of $165,000.
Taxable Income in 2009 = $165,000 * 30% = $49,500
2010: The deduction is 20% of cost, so the taxable income for 2010 is 20% of $165,000.
Taxable Income in 2010 = $165,000 * 20% = $33,000
Therefore, the taxable income for Wilson Corporation for each year is as follows:
- 2008: $82,500
- 2009: $49,500
- 2010: $33,000
Note: The above calculations are based on the information provided and assume that there are no other adjustments or differences between accounting and taxable income.