INTERMEDIATE ACCOUNTING
INTERMEDIATE ACCOUNTING
8th Edition
ISBN: 9780078025839
Author: J. David Spiceland
Publisher: McGraw-Hill Education
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Chapter 16, Problem 16.4P
To determine

Temporary Difference

Temporary difference refers to the difference of one income recognized by the tax rules and accounting rules of a company in different periods. Consequently the difference between the amount of assets and liabilities reported in the financial reports and the amount of assets and liabilities as per the company’s tax records, is known as temporary difference.

Deferred Tax

Deferred tax is an amount i.e. computed on the basis of tax liability on the income as per income statement and the income as per tax return, that difference is known as deferred tax. Deferred tax amount is deferred to the next financial year.

Deferred tax asset

When the Income Tax Expense account is more than the Income Tax Payable account, this difference is known as Deferred Tax Asset.

Deferred tax liability

When the Income Tax Expense account is less than the Income Tax Payable account, this difference is known as Deferred Tax Liability.

To prepare: The journal entry to record the income taxes in 2016 assuming no difference between accounting and taxable income.

Expert Solution & Answer
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Explanation of Solution

The journal entry to record income taxes for 2016 is as follows:

Date Account Title and Explanation

Post

Ref.

Debit

($)

Credit

($)

2016 Income Tax Expense (9)   9,000  
        Deferred Tax Liability (5)     2,880
       Income Tax Payable (1)     6,120
  (To record the income tax in 2016)      

Table (1)

Compute income tax expense amount.

Income tax expense=(Income tax payable +Deferred tax liability)= $6,120 + $2,880=$9,000 (9)

  • Income Tax Expense is an expense account and it decreases the value of shareholders’ equity account. So, debit Income Tax Expense account with $9,000.
  • Deferred tax liability is a liability and is increased by $2,880. Therefore, credit deferred tax liability account with $2,880.
  • Income Tax Payable is a liability account has increased because the taxable income has increased. So, credit Income Tax Payable account with $6,120.

The journal entry to record income taxes for 2017 is as follows:

Date Account Title and Explanation

Post

Ref.

Debit

($)

Credit

($)

2017 Income Tax Expense (10)   18,240  
        Deferred Tax Liability (6)     10,080
       Income Tax Payable (2)     8,160
  (To record the income tax in 2017)      

Table (2)

Compute income tax expense amount.

Income tax expense=(Income tax payable +Deferred tax liability)= $8,160 + $10,080=$18,240 (10)

  • Income Tax Expense is an expense account and it decreases the value of shareholders’ equity account. So, debit Income Tax Expense account with $18,240.
  • Deferred tax liability is a liability and is increased by $10,080 million. Therefore, credit deferred tax liability account with $10,080.
  • Income Tax Payable is a liability account has increased because the taxable income has increased. So, credit Income Tax Payable account with $8,160.

The journal entry to record income taxes for 2018 is as follows:

Date Account Title and Explanation

Post

Ref.

Debit

($)

Credit

($)

2018 Income Tax Expense (11)   16,000  
   Deferred Tax Liability (7)   4,800  
       Income Tax Payable (3)     20,800
  (To record the income tax in 2018)      

Table (3)

Compute income tax expense amount.

Income tax expense=(Income tax payable -Deferred tax liability)= $20,800 - $4,800=$16,000 (11)

  • Income Tax Expense is an expense account and it decreases the value of shareholders’ equity account. So, debit Income Tax Expense account with $16,000.
  • Deferred tax liability is a liability and is decreased by $4,800. Therefore, debit deferred tax liability account with $4,800.
  • Income Tax Payable is a liability account has increased because the taxable income has increased. So, credit Income Tax Payable account with $20,800.

The journal entry to record income taxes for 2019 is as follows:

Date Account Title and Explanation

Post

Ref.

Debit

($)

Credit

($)

2019 Income Tax Expense (12)   16,000  
   Deferred Tax Liability (8)   8,160  
       Income Tax Payable (4)     24,160
  (To record the income tax in 2019)      

Table (4)

Compute income tax expense amount.

Income tax expense=(Income tax payable -Deferred tax liability)= $24,160 - $8,160=$16,000 (12)

  • Income Tax Expense is an expense account and it decreases the value of shareholders’ equity account. So, debit Income Tax Expense account with $16,000.
  • Deferred tax liability is a liability and is decreased by $8,160. Therefore, debit deferred tax liability account with $8,160.
  • Income Tax Payable is a liability account has increased because the taxable income has increased. So, credit Income Tax Payable account with $24,160.

Working Notes:

The following table shows the taxable income and income tax payable for the year 2016 to 2019

 

Current

year

Future deductible amount
  2016 2017 2018 2019
Pretax accounting income $60,000 $80,000 $70,000 $70,000
Less: Depreciation for tax $(39,600) $(52,800) $(18,000) $(9,600)
Taxable income (tax return) $20,400 $27,200 $52,000 $60,400
Enacted tax rate 30% 30% 40% 40%
Income Tax Payable $6,120(1) $8,160(2) $20,800(3) $24,160(4)

Table (5)

Calculate the amount of temporary difference (Deferred tax liability) for the year 2016 to 2019.

 

Current

year

Future deductible amount Cumulative Difference
  2016 2017 2018 2019  
Straight line depreciation $30,000 $30,000 $30,000 $30,000  
Less: Depreciation for tax $(39,600) $(52,800) $(18,000) $(9,600)  
Temporary difference $(9,600) $(22,800) $12,000 $20,400  
2016   $(22,800) $12,000 $20,400 $9,600
2017     $12,000 $20,400 $32,400
2018       $20,400 $20,400
2019         $0

Table (6)

Calculate the amount of deferred tax liability to be (debited)/credited in the journal entry.

 

Current

year

Future deductible amount
  2016 2017 2018 2019
Cumulative difference $9,600 $32,400 $20,400 $0
Enacted tax rate 30% 40% 40% 40%
Year-end balance $2,880 $12,960 $8,160 $0
Less: Previous balance $0 $(2,880) $(12,960) $(8,160)
(Debit)/credit deferred tax liability $2,880(5) $10,080(6) $(4,800) (7) $(8,160) (8)

Table (7)

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Chapter 16 Solutions

INTERMEDIATE ACCOUNTING

Ch. 16 - Additional disclosures are required pertaining to...Ch. 16 - Additional disclosures are required pertaining to...Ch. 16 - Prob. 16.13QCh. 16 - Prob. 16.14QCh. 16 - IFRS and U.S. GAAP follow similar approaches to...Ch. 16 - Temporary difference LO161 A company reports...Ch. 16 - Prob. 16.2BECh. 16 - Temporary difference LO162 A company reports...Ch. 16 - Prob. 16.4BECh. 16 - Prob. 16.5BECh. 16 - Valuation allowance LO162, LO163 At the end of...Ch. 16 - VeriFone Systems is a provider of electronic card...Ch. 16 - Temporary and permanent differences; determine...Ch. 16 - Calculate taxable income LO161, LO164 Shannon...Ch. 16 - Prob. 16.10BECh. 16 - Change in tax rate LO165 Superior Developers...Ch. 16 - Net operating loss carryforward LO167 During its...Ch. 16 - Net operating loss carryback LO167 AirParts...Ch. 16 - Tax uncertainty LO169 First Bank has some...Ch. 16 - Intraperiod tax allocation LO1610 Southeast...Ch. 16 - Temporary difference; taxable income given LO161...Ch. 16 - Prob. 16.2ECh. 16 - Prob. 16.3ECh. 16 - Prob. 16.4ECh. 16 - Prob. 16.5ECh. 16 - Prob. 16.6ECh. 16 - Identify future taxable amounts and future...Ch. 16 - Calculate income tax amounts under various...Ch. 16 - Determine taxable income LO161, LO162 Eight...Ch. 16 - Prob. 16.10ECh. 16 - Prob. 16.11ECh. 16 - Prob. 16.12ECh. 16 - Prob. 16.13ECh. 16 - Prob. 16.14ECh. 16 - Prob. 16.15ECh. 16 - Prob. 16.16ECh. 16 - Prob. 16.17ECh. 16 - Prob. 16.18ECh. 16 - Prob. 16.19ECh. 16 - Prob. 16.20ECh. 16 - Prob. 16.21ECh. 16 - Prob. 16.22ECh. 16 - Identifying income tax deferrals LO161, LO162,...Ch. 16 - Multiple temporary differences; balance sheet...Ch. 16 - E16–25 Multiple tax rates; balance sheet...Ch. 16 - Prob. 16.26ECh. 16 - Concepts; terminology LO161 through LO168 Listed...Ch. 16 - Tax credit; uncertainty regarding sustainability ...Ch. 16 - Prob. 16.29ECh. 16 - FASB codification research LO165, LO168, LO1610...Ch. 16 - Prob. 1CPACh. 16 - Prob. 2CPACh. 16 - Prob. 3CPACh. 16 - 4. Stone Co. began operations in 2016 and reported...Ch. 16 - Prob. 5CPACh. 16 - Prob. 6CPACh. 16 - Prob. 7CPACh. 16 - Prob. 1CMACh. 16 - Prob. 2CMACh. 16 - Prob. 3CMACh. 16 - Prob. 16.1PCh. 16 - Prob. 16.2PCh. 16 - Prob. 16.3PCh. 16 - Prob. 16.4PCh. 16 - Prob. 16.5PCh. 16 - Prob. 16.6PCh. 16 - Prob. 16.7PCh. 16 - Prob. 16.8PCh. 16 - P 16–9 Determine deferred tax assets and...Ch. 16 - Prob. 16.10PCh. 16 - Delta Air Lines revealed in its 10-K filing that...Ch. 16 - Prob. 16.12PCh. 16 - Prob. 16.13PCh. 16 - Prob. 16.1BYPCh. 16 - Prob. 16.2BYPCh. 16 - Prob. 16.3BYPCh. 16 - Prob. 16.4BYPCh. 16 - Prob. 16.5BYPCh. 16 - Prob. 16.6BYPCh. 16 - Research Case 166 Researching the way tax...Ch. 16 - Access the financial statements and related...Ch. 16 - Prob. 16.9BYPCh. 16 - Prob. 16.10BYPCh. 16 - Prob. 16.13BYPCh. 16 - Prob. 1AFKC
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