Question

At the end of 2018, Smith Corporation had no book-tax differences and no deferred income tax assets or deferred income tax liabilities.

During the year 2019, two book-tax differences occurred. One was a $10,000 permanent difference that caused taxable income to be larger than financial income. The other was a $110,000 temporary difference that caused taxable income to be smaller than financial income. That $110,000 temporary difference will reverse over the years 2020 and 2021, causing future taxable amounts of $40,000 and $70,000 in 2020 and 2021, respectively.

Smiths pretax financial income for 2019 was $260,000. Smiths tax rate in 2019 is 35%, but starting in 2020 the tax rate will fall to 26%.

(a.) Prepare schedule that reconciles pretax financial income to taxable income for 2019

(b.)Compute the amount of income tax payable (current income tax expense) for 2019.

(c.) Compute the amounts of any deferred income tax assets and/or deferred income tax liabilities as of the end of 2019.

(d.)Compute the amount of Smiths income tax expense for 2019.

(e.) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2019.

Answer 1

a) Reconciliation of Pretax financial income and Taxable income for 2019 (Amounts in $)

Pretax Financial Income for 2019	260,000
Add: Permanent Differences (as it increase taxable income)	10,000
Less: Temporary Differences (as it decreases taxable income)	(110,000)
Taxable Income for 2019	160,000

Therefore taxable income for 2019 is $160,000

b) Income tax payable for 2019 = Taxable Income for 2019*Tax rate of 2019

= $160,000*35% = $56,000

Therefore income tax payable is $56,000.

c) As taxable income is lower than the pretax financial income, there will be a deferred tax liability (because there will be more tax payable in future).

Deferred tax liability = Temporary differences*Tax rate for 2019

= $110,000*35% = $38,500

Therefore the amounts of deferred income tax liabilities as of the end of 2019 is $38,500.

d) Income tax expense for 2019 = Income tax payable+Deferred tax liabilities

= $56,000+$38,500 = $94,500

e) Journal entry to record income taxes is shown as follows:- (Amounts in $)

Date	Account Titles and Explanations	Debit	Credit
Dec 31, 2019	Income tax expense	94,500
	Deferred tax liabilities		38,500
	Income tax payable		56,000
	(To record the income tax expense for 2019)