Question

nix Wednesday TAX-4: Hanks Company The Hanks Company has the following income statement for the year ended December 31, 2016: Subscription revenue Interest revenue on municipal bonds Total revenues $250,000 4.500 254,500 Expenses: Subscription costs Wages Rent expense Depreciation on equipment Insurance expense Total expenses Income before tax 120,000 30.000 15,000 45,000 8,000 218.000 36,500 Hanks Company has the following partially completed comparative balance sheets as of December 31: 2016 2015 $ 92,775 19.250 3,000 2,500 $ 10,000 19,250 2.800 3,200 Assets Cash Tax refund receivable Prepaid rent Prepaid insurance Municipal bonds: Cost and fair value Interest receivable Equipment (net) Deferred tax asset - noncurrent Total assets 50,000 2,250 45,000 2222 ???? 50,000 1,125 90,000 26,825 203,200 7,500 2,000 Liabilities and Owners' Equity Subscriptions received in advance Wages payable Taxes payable Deferred tax liability-noncurrent Common stock - par value Common stock - capital in excess of par Retained earnings Total liabilities & owners' equity 9,000 2,400 ???? ???? 30,000 20,000 ????? ???? 16,350 30,000 20,000 127,350 203,200

Answer 1

Defered Tax: The tax effect on difference between the income as per books of accounts and income as per income tax laws

there are two types 1) Defered tax asset

2) Defered tax liability

Defered tax asset: these are the assets which reduces the taxable income in future

the situation can happens if the tax as per tax laws is higher than the tax as per books of accounts,in such case we will pay tax as per tax laws that means we paid more tax compared to tax as per books so the excess paid is treated as defered tax asset and the same is used to reduce tax liability in future

Defered tax liability: if the tax on income as per tax laws is lower compared to tax on income as per books of accounts.In this case we will tax as per tax laws only but to the extent of difference we recognize liability as defered tax liability

Taxable income as per income tax laws:

Total taxable income = $ 49,400

Tax rate = 35%

A ) Tax payable = $49400*35%

= $17,290

Taxable income as per books:

Total income= $36,500

Tax as per books = $36,500*35% = $12,775

Depreciation as per Tax laws =$225000*13.33%= $30,000

Depreciation as per books = $45,000

Temporary deference for defered tax purpose = $15,000

B) Amount of defered tax asset and defered tax liability:

Particulars Defered tax asset Defered tax liability

1)Depreciation   = $ 15000*35%=$5250 -

2) prepaid rent   = $ 200*35% = $70 -

($3000-$2800)

3) Wages payable =$400*35% = $140

c) Tax expense for the year:

Tax expense = current tax + defered tax liability

= $17290 + $140

= $17,430

D) journal entry for tax enpense:

For current tax: Profit and loss a/c dr $17290

to current Tax payable $17290

(Being the current tax is charged to profit and loss a/c)

For Defered tax liability: Profit and loss A/c dr $140

to Defered tax liability $140

( Being the defered tax liability is recognized)

E) Tax expense is the total of current tax and defered tax

We will pay tax on taxable income which is calculated as per income tax laws, not on taxable income which is calculated as per books of accounts