Question

Alvis Corporation reports pretax accounting income of $500,000, but due to a single temporary difference, taxable income is only $325,000. At the beginning of the year, no temporary differences existed. Required: 1. Assuming a tax rate of 35%, what will be Alvis’s net income? 2. What will Alvis report in the balance sheet pertaining to income taxes?

Answer 1

Answer

• Workings

A	Pretax Income	$500,000
B	Taxable Income	$325,000
C = A - B	Temporary Difference	$175,000	Taxable income is LESS, which means lower taxes in current period.
D	Tax Rate	35%
E = C x D	Deferred Tax Liability	$61,250	Lower taxes in current period = Creation of Liabilities
F = B x D	Income Tax Payable	$113,750
G = E+F	Total Income tax expense	$175,000

• Requirement 1

Net Income = Pretax Income – Income tax expense
= $ 500000 – 175000
= $ 325,000

• Requirement 2

In Balance Sheet

Liabilities:
Income tax payable	$113,750
Deferred Tax Liabilities	$61,250