Question

E19-1.

(One Temporary Difference, Future Taxable Amounts, One Rate, No Beginning Deferred Taxes) 2 5 South Carolina Corporation has one temporary difference at the end of 2014 that will reverse and cause taxable amounts of $55,000 in 2015, $60,000 in 2016, and $65,000 in 2017. South Carolina's pretax financial income for 2014 is $300,000, and the tax rate is 30% for all years. There are no deferred taxes at the beginning of 2014. Instructions (a)   Compute taxable income and income taxes payable for 2014. (b)   Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2014. (c)   Prepare the income tax expense section of the income statement for 2014, beginning with the line ?Income before income taxes.?

Answer 1

Concepts and reason

Tax is the amount of a compulsory monetary charge or any other levy imposed on a person liable to pay it by government to fund various expenditures and welfare schemes of the government. Tax is a major revenue source of the government. The income statement consists of both income tax and deferred tax.

An Income tax expense is a tax on the income of the individual or entities who are liable to pay tax. Income tax varies with the amount of income earned by an assessed. Income tax increases with increase in income and various deductions are also permissible to taxpayers while calculating income.

Deferred income tax is a virtual asset or liability created to reflect the difference in calculation of income and tax as per assesses books of account and as per taxation laws prevailing in its jurisdiction. Deferred tax is calculated based on the temporary timing differences which are capable of reversal in the subsequent time periods.

Fundamentals

The following terms are relevant for understanding the concept of income tax and deferred tax:

• Taxable income: Taxable income is the income on which an individual’s or a company’s income tax is calculated as per government tax laws.

• Accounting income: Accounting income is the income which is calculated by a company from its accounting records maintained.

• Temporary differences: Temporary differences are the differences between book income and taxable income due to certain items of income and expenses that are recognized in one period for calculating taxable income and in a different period in the books for calculating accounting income.

• Permanent differences: Permanent differences are those differences that are recognized in the books but are disallowed in taxation laws, that is, they are the items of income/ expense which are to be excluded in the calculation of taxable income.

Deferred tax is the result of temporary differences and permanent differences are completely ignored for calculation of deferred tax due to their incapacity of reversal in the subsequent time periods.

The items causing temporary differences are added/ subtracted from accounting income to arrive at taxable income. Examples of temporary difference includes methods of charging depreciation, quantum of deduction allowable to taxpayer etc.

Compute taxable income and income taxes payable for 2014 as follows:

[Part a]

Part a

Part a

Compute the deferred tax liability as follows:

Pass the journal entry to record the income tax expense, deferred income taxes and income tax payable for 2014 as follows:

[Part b]

Part b

Part b

Prepare the income tax section of the income statement for 2014 as follows:

[Part c]

Part c

Part c

Ans: Part a

The taxable income and income taxes payable for 2014 are $120,000 and $36,000 respectively.

Part b

Pass the journal entry to record the income tax expense, deferred income taxes and income tax payable for 2014 as follows:

Part c

Therefore, the net income for the year 2014 as per income statement is $210,000.