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Chapter 19: 8Q (page 1093)

Pretax financial income for Lake Inc. is \(300,000, and its taxable income is \)100,000 for 2018. Its only temporary difference at the end of the period relates to a $70,000 difference due to excess depreciation for tax purposes. If the tax rate is 40% for all periods, compute the amount of income tax expense to report in 2018. No deferred income taxes existed at the beginning of the year.

Short Answer

Expert verified

Annual depreciation is the amount of depreciation levied on the value of an assetduring a year. The value keeps on diminishing up to itsscrap value or resale value.

Step by step solution

01

Computation of deferred tax expense

Particulars

Amount

Taxable income

$100,000

Multiply: Tax rate

40%

Income tax payable

$40,000

02

Calculation of income tax expense

Particulars

Amount

Future taxable amount

$70,000

Multiply: Tax rate

40%

Deferred tax liability

$28,000

Add: Income tax payable

$40,000

Income tax expense

$68,000

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Most popular questions from this chapter

What are the possible treatments for tax purposes of a net operating loss? What are the circumstances that determine the option to be applied? What is the proper treatment of a net operating loss for financial reporting purposes?

What is an uncertain tax position, and what are the general guidelines for accounting for uncertain tax positions?

Describe the procedure(s) involved in classifying deferred tax amounts on the statement of financial position under IFRS.

Wise Company began operations at the beginning of 2018. The following information pertains to this company. 1. Pretax financial income for 2018 is \(100,000. 2. The tax rate enacted for 2018 and future years is 40%. 3. Differences between the 2018 income statement and tax return are listed below: (a) Warranty expense accrued for financial reporting purposes amounts to \)7,000. Warranty deductions per the tax return amount to \(2,000. (b) Gross profit on construction contracts using the percentage-of-completion method per books amounts to \)92,000. Gross profit on construction contracts for tax purposes amounts to \(67,000. (c) Depreciation of property, plant, and equipment for financial reporting purposes amounts to \)60,000. Depreciation of these assets amounts to \(80,000 for the tax return. (d) A \)3,500 fine paid for violation of pollution laws was deducted in computing pretax financial income. (e) Interest revenue recognized on an investment in tax-exempt municipal bonds amounts to $1,500. 4. Taxable income is expected for the next few years. (Assume (a) is short-term in nature; assume (b) and (c) are long-term in nature.) Instructions (a) Compute taxable income for 2018. (b) Compute the deferred taxes at December 31, 2018, that relate to the temporary differences described above. Clearly label them as deferred tax asset or liability. (c) Prepare the journal entry to record income tax expense, deferred taxes, and income taxes payable for 2018. (d) Draft the income tax expense section of the income statement, beginning with 鈥淚ncome before income taxes.鈥�

Question: What are the two basic requirements applied to the measurement of current and deferred income taxes at the date of the financial statements?
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