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 $1,040,000 and a tax basis of $780,000. 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 $36,000 the previous year, prepare the appropriate journal entry to record income taxes this year.

Answer 1

Solution:

Deferred tax liability to be reported in balance sheet = ($1,040,000 - $780,000) * 25% = $65,000

Journal Entries - Kara Fashions
Event		Debit	Credit
1	Income tax expense Dr	$1,279,000.00
	To Income taxes payable ($5,000,000*25%)		$1,250,000.00
	To Deferred tax liability ($65,000 - $36,000)		$29,000.00
	(To record income tax expense for the year)