Question

Alvis Corporation reports pretax accounting income of $400,000, but due to a single temporary difference, taxable income is only $250.000. At the beginning of the year, no temporary differences existed Required: 1. Assuming a tax rate of 35%, what will be Alvis's net income? 2. What will Alvis report in the balance sheet pertaining to income taxes? Step-by-step solution Step 1 of 2 A Requirement 1 Since taxable income is less than pretax accounting income, a future taxable amount will occur when the temporary difference reverses. This means a deferred tax liability should be recorded to reflect the future tax consequences of the temporary difference Income tax expense (to balance) 140,000 Deferred tax liability ([5400,000 - 250.000] x 359) 52.500 Income tax payable ($250,000 x 35%) 87,500 As a result, net income is $260.000: Pretax accounting income $400,000 Income tax expense 140.000 Net income $260.000

Why is this called deferred tax liability instead of deferred tax asset?

Answer 1

Solution:

Taxable income is lower than accounting income that will result into future taxable income to be higher than accounting income. If future taxable income will be higher than we have to pay higher taxes in future. In view of the same when current taxable income is lower than accounting income due to temporary difference, same will result in creation of deferred tax liability.