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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 controversy relates to the accounting for net operating loss carryforwards?

Oxford Corporation began operations in 2017 and reported pretax financial income of \(225,000 for the year. Oxford’s tax depreciation exceeded its book depreciation by \)40,000. Oxford’s tax rate for 2017 and years thereafter is 30%. In its December 31, 2017, balance sheet, what amount of deferred tax liability should be reported?

Mitchell Corporation had income before income taxes of \(195,000 in 2017. Mitchell’s current income tax expense is \)48,000, and deferred income tax expense is $30,000. Prepare Mitchell’s 2017 income statement, beginning with Income before income taxes.

At the end of the year, Falabella Co. has pretax financial income of \(550,000. Included in the \)550,000 is \(70,000 interest income on municipal bonds, \)25,000 fine for dumping hazardous waste, and depreciation of \(60,000. Depreciation for tax purposes is \)45,000. Compute income taxes payable, assuming the tax rate is 30% for all periods.

The asset-liability approach for recording deferred income taxes is an integral part of generally accepted accounting principles.

Instructions (a) Indicate whether each of the following independent situations should be treated as a temporary difference or as a permanent difference, and explain why. (1) Estimated warranty costs (covering a 3-year warranty) are expensed for financial reporting purposes at the time of sale but deducted for income tax purposes when paid. (2) Depreciation for book and income tax purposes differs because of different bases of carrying the related property, which was acquired in a trade-in. The different bases are a result of different rules used for book and tax purposes to compute the basis of property acquired in a trade-in. (3) A company properly uses the equity method to account for its 30% investment in another company. The investee pays dividends that are about 10% of its annual earnings. (4) A company reports a gain on an involuntary conversion of a nonmonetary asset to a monetary asset. The company elects to replace the property within the statutory period using the total proceeds so the gain is not reported on the current year’s tax return.
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