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 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.
When the Income Tax Expense account is more than the Income Tax Payable account, this difference is known as Deferred Tax Asset.
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
Explanation of Solution
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 (9) | 9,000 | ||
Deferred Tax Liability (5) | 2,880 | |||
Income Tax Payable (1) | 6,120 | |||
(To record the income tax in 2018) |
Table (1)
Compute income tax expense amount.
- 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 $6,120.
The journal entry to record income taxes for 2019 is as follows:
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
2019 | Income Tax Expense (10) | 18,240 | ||
Deferred Tax Liability (6) | 10,080 | |||
Income Tax Payable (2) | 8,160 | |||
(To record the income tax in 2019) |
Table (2)
Compute income tax expense amount.
- 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 $8,160.
The journal entry to record income taxes for 2020 is as follows:
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
2020 | Income Tax Expense (11) | 16,000 | ||
Deferred Tax Liability (7) | 4,800 | |||
Income Tax Payable (3) | 20,800 | |||
(To record the income tax in 2020) |
Table (3)
Compute income tax expense amount.
- 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 $20,800.
The journal entry to record income taxes for 2021 is as follows:
Date | Account Title and Explanation | Post Ref. |
Debit ($) |
Credit ($) |
2021 | Income Tax Expense (12) | 16,000 | ||
Deferred Tax Liability (8) | 8,160 | |||
Income Tax Payable (4) | 24,160 | |||
(To record the income tax in 2021) |
Table (4)
Compute income tax expense amount.
- 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 2018 to 2021
Current year |
Future deductible amount | |||
2018 | 2019 | 2020 | 2021 | |
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 2018 to 2021.
Current year |
Future deductible amount | Cumulative Difference | |||
2018 | 2019 | 2020 | 2021 | ||
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 | |||
2018 | 2019 | 2020 | 2021 | |
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)/creditdeferred tax liability | $2,880(5) | $10,080(6) | $(4,800) (7) | $(8,160) (8) |
Table (7)
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Chapter 16 Solutions
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