Question

9:01 1 LTE Homework+1 Homework Charolaise had $55,000 of net income before tax in their first year of operations. The only income or expense that was recognized differently for book and tax purposes was the method in which they recognized revenue. Charolaise used percentage of completion for book purposes and completed contract method for tax purposes. Contract revenue for book was $92,000 and $62,000 for tax. The tax rate was 30%. Prepare the journal entry for income taxes for the current year Simmental had $72,000 of book income before tax in 2018, their first year of operations. The only difference between book and tax income was their calculation of cost of goods sold. Book cost of goods sold was $186,000 and tax cost of goods sold was $212,000. The income tax rate is 30% in all years. Prepare the journal entry for income taxes

Answer 1

Ans: Charolaise Use different method for revenue recognition in books and that of tax purposes. This Difference will give rise to Deferred Tax Asset or Liability.

Computation of Deferred Tax Asset or Liability
Particulars		Amount ($)
Profit as per books of Accounts		$92,000
Income for tax purposes		$62,000
Timing Difference		$30,000
Tax Rate		30%
Deferred tax Liability		$9,000

Income tax	$62,000*30%
	$18,600

Date	Particulars	Dr.($)	Cr.($)
	Income tax Expense A/c Dr. To Provision for Income tax A/c (being Provision for income tax created)	18,600	18,600
	Profit and loss A/c Dr. To Deferred tax A/c To Income tax Expense A/c ( Being Deferred tax liability recorded and Income tax expenses transferred to Profit and Loss A/c)	27,600	9,000 18600

2) Simmental

Profit before tax $72,000

Cost of goods sold for books is $186,000

Cost of goods sold for Tax purposes is $212,000

Computation of Income for Tax Purpose
Particulars		Amount ($)
Profit as per books of Accounts		$72,000
Add:
Cost of goods sold for books		$186,000
Less
Cost of goods sold for Tax purposes		$212,000
Income for tax purpose		$46,000
Tax Rate		30%
Income Tax		$13,800

Computation of Deferred Tax Asset or Liability
Particulars		Amount ($)
Profit as per books of Accounts		$72,000
Income for tax purposes		$46,000
Timing Difference		$26,000
Tax Rate		30%
Deferred tax Liability		$7,800

Journal Entries

Date	Particulars	Dr. ($)	Cr.($)
	Income tax Expense A/c Dr. To Provision for Income tax A/c (being Provision for income tax created)	13,800	13,800
	Profit and Loss A/c Dr. To Income tax Expense A/c Dr. (being Income tax expenses transferred to profit and loss A/c)	13,800	13,800
	Profit and Loss A/c Dr. To Deferred tax A/c (being Deferred tax liability created )	7,800	7,800

*Deferred tax liability has been created as in both the case income as income tax is lower then book profit