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please explain this illustration 16-A
this is due tomorrow.

what is happening here in this illustration?

Because tax laws permit the company to delay reporting this income as part of taxable the tax on that income. As shown in Illustration 16-iAC, that tax is not avoided, just deferred. income, the company is able to defer paying Illustration 16-1A Determining and Recording Income Taxes-2018 Future Taxable Amounts Current Year 2018 Future Taxable Amounts (total) ($ in milions) Pretax accounting income Temporary difference: 2019 2020 $140 $10 $40 (40) $100 Installment income $30 Taxable Income (tax return) Enacted tax rate in the 40% $ 40 40% income statement, not tax return Tax payable currently Deferred Tax Liablity Desired ending balance Deferred Tax Llablity $ 16 0 beg. bal. 16 16 end, bal. Less: Beginning balance o Change in balance $16 Journal Entry at the End of 2018 Income tax expense (to balance) 56 Income tax payable (determined above) Deferred tax liability (determined above 40 16


With future taxable amounts甲of $40 million, taxable at 40%, a $16 million deferredtax!iability should be recognized as of the end of 2018. Because no previous balance exists, we credit deferred tax liability for the entire $16 million.

I need to know this before tomorrow.

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Future Taxable Amounts S in millions Pretax accounting Income Temporary difference Current Year 2018 $140 Future Taxable Amounts lotal) 2019 020 Note 2 Instailment Income Taxable income (tax return) Enacted tax rate 40) $100 Note 3 40% 40% ome statemtent, not Tax payable currently Deferred Taxl Deferred Tax Liabllity Desired ending balance Less Beginning batance s 16 0 beg. bal 16 Note 4 16 end bal Change in batance$16 Journal Entry at the End of 2018 Income tax expense (to balance) Note 5 56 income tax payable (determined above) 40 16 Explanations:- Note 1:- Meaning of Deferred Tax Profits as per financial statement will not match with Taxable profit because Financial Statements accounting is made on Accrual Basis (meaning Accounting method that records revenues and expenses when they are incurred, regardless of when cash is exchanged. The term accrual refers to any individual entry recording revenue or expense in the absence of a cash transaction.) But recognized such income on receipt for computing taxable income So Tax payable as per Financial statement and Taxable Income calculation will be different. This Difference Between above two is Deferred Tax.Note 2 :- Pretax Accounting Profit This is Profit of 140 is as per financial statement including installment income 40 (Which is accounted on accrual basis) But before computing Tax payable Note 3: Installment Income Installment income is accounted on accrual basis but for Taxable Income Calculation only income on Cash receipt is considered. Therefore installment income should be Deducted from Accounting profit to arrive at Taxable income 140 40 100 Note 4 :- Deferred Tax Liability A deferred tax liability is a tax that is assessed or is due for the current period but has not yet been paid. The deferral comes from the difference in timing between when the tax is accrued and when the tax is paid. A deferred tax liability records the fact the company will, in the future, pay more income tax because of a transaction that took place during the current period, such as an installment sale receivable Profit as per the books of accounts is more than the profit in the taxable income calculation. Hence deferred tax liability arises in the case Profit Tax Rate Tax Payable Difference As per Accounting 140 40% 56 As per Taxable income 100 40% 40 16 (56-40) Difference of 16 is expected to be paid in the next year which is deferred liability to the companyNote 5:- Journal Entry Income Tax Expenses Alc Dr (tax as per accounting profit) 56 To Income Tax payable A/c (tax as per taxable income) To Deferred Tax liability A/c(tax expected to be paid in next year) 16 40

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