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Chapter 19: Question 11BE (page 1094)

At December 31, 2017, Fell Corporation had a deferred tax liability of \(680,000, resulting from future taxable amounts of \)2,000,000 and an enacted tax rate of 34%. In May 2018, a new income tax act is signed into law that raises the tax rate to 40% for 2018 and future years. Prepare the journal entry for Fell to adjust the deferred tax liability.

Short Answer

Expert verified

Taxable amountis the type of amount an organization calculates aftersubtracting all of its deductions. Theeffective tax rateis implied on thetaxable amounttocalculate the tax.

Step by step solution

01

Computation of deferred tax liability

DeferredTaxLiability=Taxableincome脳Differenceinthetaxrate=$2,000,000脳(40%-34%)=$120,000

02

Journal entry

Fell Corporation
Journal Entry

Date

Particulars

Debit

Credit

2017

Income tax expense

$120,000

Deferred tax liability

$120,000

(To record the deferred tax liability)

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Most popular questions from this chapter

What are some of the reasons that the components of income tax expense should be disclosed and a reconciliation between the effective tax rate and the statutory tax rate be provided?

At the end of 2016, Lucretia McEvil Company has \(180,000 of cumulative temporary differences that will result in reporting the following future taxable amounts. 2017 \) 60,000 2018 50,000 2019 40,000 2020 30,000 \(180,000Tax rates enacted as of the beginning of 2015 are: 2015 and 2016 40% 2017 and 2018 30% 2019 and later 25% McEvil鈥檚 taxable income for 2016 is \)320,000. Taxable income is expected in all future years. Instructions (a) Prepare the journal entry for McEvil to record income taxes payable, deferred income taxes, and income tax expense for 2016, assuming that there were no deferred taxes at the end of 2015. (b) Prepare the journal entry for McEvil to record income taxes payable, deferred income taxes, and income tax expense for 2016, assuming that there was a balance of $22,000 in a Deferred Tax Liability account at the end of 2015.

Taxable income and pretax financial income would be identical for Huber Co. except for its treatments of gross profit on installment sales and estimated costs of warranties. The following income computations have been prepared. Taxable Income 2016 2017 2018 Excess of revenues over expenses (excluding two temporary differences) \(160,000 \)210,000 \(90,000 Installment gross profi t collected 8,000 8,000 8,000 Expenditures for warranties (5,000) (5,000) (5,000) Taxable income \)163,000 \(213,000 \)93,000 Pretax Financial Income Excess of revenues over expenses (excluding two temporary differences) \(160,000 \)210,000 \(90,000 Installment gross profi t recognized 24,000 鈥�0鈥� 鈥�0鈥� Estimated cost of warranties (15,000) 鈥�0鈥� 鈥�0鈥� Income before taxes \)169,000 \(210,000 \)90,000. The tax rates in effect are 2016, 40%; 2017 and 2018, 45%. All tax rates were enacted into law on January 1, 2016. No deferred income taxes existed at the beginning of 2016. Taxable income is expected in all future years. Instructions Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2016, 2017, and 2018.

At December 31, 2017, Cascade Company had a net deferred tax liability of \(450,000. An explanation of the items that compose this balance is as follows.

Temporary Differences in Deferred Taxes

Resulting Balances

1. Excess of tax depreciation over book depreciation.

\)200,000

2. Accrual, for book purposes, of estimated loss contingency from pending lawsuit that is expected to be settled in 2018. The loss will be deducted on the tax return when paid.

\( (50,000)

3. Accrual method used for book purposes and installment method used for tax purposes for an isolated installment sale of an investment.

\)300,000

In analyzing the temporary differences, you find that \(30,000 of the depreciation temporary difference will reverse in 2018, and \)120,000 of the temporary difference due to the installment sale will reverse in 2018. The tax rate for all years is 40%.

Instructions

Indicate the manner in which deferred taxes should be presented on Cascade Company鈥檚 December 31, 2017, statement of financial position.

Dexter Company appropriately uses the asset-liability method to record deferred income taxes. Dexter reports depreciation expense for certain machinery purchased this year using the modified accelerated cost recovery system (MACRS) for income tax purposes and the straight-line basis for financial reporting purposes. The tax deduction is the larger amount this year. Dexter received rent revenues in advance this year. These revenues are included in this year鈥檚 taxable income. However, for financial reporting purposes, these revenues are reported as unearned revenues, a current liability. Instructions (a) What are the principles of the asset-liability approach?
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