Question

Kara Fashions uses straight-line depreciation for financial statement reporting and MACRS for income tax reporting. Three years after its purchase, one of Kara's buildings has a book value of $800,000 and a tax basis of $600,000. There were no other temporary differences and no permanent differences. Taxable income was $5 million and Kara's tax rate is 25%. What is the deferred tax liability to be reported in the balance sheet? Assuming that the deferred tax liability balance was $30,000 the previous year, prepare the appropriate journal entry to record income taxes this year. Complete this question by entering your answers in the tabs below. Balance Sheet General Journal What is the deferred tax liability to be reported in the balance sheet? Deferred tax liability < Balance Sheet General Journal >

Answer 1

Deferred tax liability is to be recognized for Kara Fashion. I have explained in detail in the attachment. Kindly go through it.
- the United States laws and companies to maintain when separate seas of books for Emancial and fox fuaposed here is a dirrerence between the taxable income and the Poetox financial income, we can it a disparity in accounting. since these are temporary dirrerences, a company expect to Settle its tax liability and pay increased taxes in the future, so it records a.deberred tox Dobility. In other words, a detersed tax liability is recognized in the current period for the taxes Payable in future periods one common situation that givel sise to deferred tax liability is depreciation of fixed assets Tax lows allow for the modified accelerooted cost recomery system (MACRS) depreciation method, while most companies use the straight line depreciation method tos financial reporting Due to MACRs depreciation methed, depreciation deduction is higher in the initial years which means entity will end of Paying less tax for the current period. This will create defessed tax rability in the booke ! Here we need to know the dirrerence between depreciation charged as per financial accounting method and depreciation Charged of Per tax basis, so we need more information regarding the book value or Kata's building in the begining and how much depreciation has been charged for the first 2 years under tax basis. The dirrerence between the two methods multipled by a5 %. fox rade will be eand to deverred tox liability that will be recognized

However we can calculate income tax for this fear for Kasa Fashion Tayable Income = $5M Tax rare - 251 Income Tax = 85m x 25% - $1.25M the Jarrnal entry would be as follows: Income Tax (Expence) Al DR $1.250 To Income Tax payable ALL CR $1.25 M Deteored Tax Lability Journal entry profit & Loss All Dr To Deferred Tax liability All er Here we need more information like yearly depreciation Charged as per financial accounting method and yearly depreciation charged as per MACRS depreciation to arrive at the dirrerence and accordingly calculate the deferred tax liability by multiplying the day gape or 25t..