Chapter 19: Q11IFRS (page 1115)

Callaway Corp. has a deferred tax asset account with a balance of $150,000 at the end of 2017 due to a single cumulative temporary difference of $375,000. At the end of 2018, this same temporary difference has increased to a cumulative amount of $500,000. Taxable income for 2018 is $850,000. The tax rate is 40% for all years.
Instructions
(a)Record income tax expense, deferred income taxes, and income taxes payable for 2018, assuming that it is probable that the deferred tax asset will be realized.
(b) Assuming that it is probable that $30,000 of the deferred tax asset will not be realized, prepare the journal entry at the end of 2018 to recognize this probability.

Expert verified

a) Income tax expense is debited $290,000, deferred tax asset is debited by $50,000 and income tax payable is credited by $340,000

b) Income tax expense is debited, and deferred tax asset is credited by $30,000, respectively.

Step by step solution

A business's tax responsibility to the government in which it operates is known as "income tax payable."

Working notes:

Calculation of income tax payable

$\begin{matrix} Income tax payable = Taxable income \times Enacted tax rate \\ = $ 850, 000 \times 40 % \\ = $ 340, 000 \end{matrix}$

Deferred Tax
Date	Cumulative future taxable (Deductible) amount	Taxrate	(Asset)	Liability
12/31/18	$(500,000)	40%	$(200,000)
Deferred tax asset at the end of 2018				$200,000
Deferred tax asset at the beginning of 2018				150,000
Deferred tax benefit for 2018 (increase in deferred tax asset)				(50,000)
Current tax expense for 2018 (Income taxes payable)				340,000
Income tax expense for 2018				$290,000

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Temporary differences	Resulting balance in deferred taxes
Excess of tax depreciation over book depreciation	\)200,000
Accruals, for book purpose, of estimated loss contingency from pending lawsuit that is expected to be settled in 2017. The loss will be deducted on the tax return when paid	(50,000)
Accrual method used for book purposes and installment method used for tax purposes for an isolated installment sale of an investment	225,000
	\(375,000