Question

The following facts relate to Stellar Corporation. 1. Deferred tax liability, January 1, 2017, $67,200. 2. Deferred tax asset, January 1, 2017, $22,400. 3. Taxable income for 2017, $117,600. 4. Cumulative temporary difference at December 31, 2017, giving rise to future taxable amounts, $257,600. 5. Cumulative temporary difference at December 31, 2017, giving rise to future deductible amounts, $106,400. 6. Tax rate for all years, 40%. No permanent differences exist. 7. The company is expected to operate profitably in the future.

Prepare the income tax expense section of the income statement for 2017, beginning with the line “Income before income taxes.

Answer 1

Solution:

Computation of Required balance and recognition of Deferred tax liability and Deferred tax Assets -Stellar Corporation
Particulars	Amount
Cumulative temporary differences giving rise to future taxable amount	$257,600.00
Required ending balance in deferred tax liability ($257,600*40%)	$103,040.00
Existing balance of deferred tax liability	$67,200.00
Deferred tax liability to be recorded for current year	$35,840.00
Temporary differences for current year giving rise to future taxable amount ($35,840/40%)	$89,600.00
Cumulative temporary differences giving rise to future deductible amount	$106,400.00
Required ending balance in deferred tax Assets (106,400*40%)	$42,560.00
Existing balance of deferred tax Assets	$22,400.00
Deferred tax assets to be recorded for current year	$20,160.00
Temporary differences for current year giving rise to future deductible amount ($20,160/40%)	$50,400.00

Computation of pretax financial income
Particulars	Amount
Taxable income	$117,600.00
Add: Temporary differences for current year giving rise to future taxable amount	$89,600.00
Less: Temporary differences for current year giving rise to future deductible amount	$50,400.00
Pre tax financial income	$156,800.00

Steller Corporation
Income Statement (Partial)
For year ended December 31, 2017
Particulars		Amount
Income before taxes		$156,800.00
Less: Income tax expense:
Current Tax	$47,040.00
Deferred tax ($35,840 - $20,160)	$15,680.00
		$62,720.00
Net Income		$94,080.00