Company Y had book income of $600,000. The following items were identified: 1. I
ID: 2338483 • Letter: C
Question
Company Y had book income of $600,000. The following items were identified:
1. Income from PA Municiple Bonds: 10,000
2. Excess Depreciation Expense: 60,000
3. Officers Life Insurance Expense: 5,000
4. Bad Debt Provision (Expense): 7,000 (no- charge offs this year)
5. Warranty Reserve (Expense): 12,000 (no claims this year)
6. Meals and Entertainment Expense: 20,000 (100% of expenses)
Company Y's tax rate is 40%
Beginning of the year, cumulative temporary difference is computed as follows:
Book Accumulated Depreciation: 110,000
Tax Accumulated Depreciation: 150,000
Cumulative Difference in PP&E: 40,000
Cumulative Difference in Accounts Receuvable Provision: 20,000
Cumulative Difference in Warranty Reseve: 80,000
Taxable Income: 674,000
Deferred Tax Asset: 31,600
Income Tax Payable: 269,600
Income Tax Expense: 238,000
1. Calculate Deferred expense/benefit
2. Prepare an adjusting journal entry to record the deferred tax provision
3. Calculate total provision (current plus deffered)
Explanation / Answer
1. Deferred Tax Expense / Benefit Calculation:
It is presumed that in this part, the question is related to "Deferred Tax Expense" and not "Deferred Expense".
A deferred tax expense is a tax expense which has not yet been paid by the corporation and which has accrued due to difference in accounting principles defined by GAAP and Taxation Law. Similarliy a deferred tax benefit is a non-cash income to the corporation. Deferred Tax Expense is mostly related to difference in deprecation calculation methods.
Net Difference in Depreciation= Book Accumulated Depreciation- Tax Accumulated Depreciation= 110000-150000= (-)40000
Deferred Tax Liability (Since book dep. is less than tax dep.) = Company's Tax Rate * Difference in Depreciation = 40% * 40000= 16000
2. Journal Entry for Deferred Tax Liability Provision
Deferred Tax Expense A/c Dr. 16000
To Deferred Tax Liability A/c 16000
(Being DTL of 16000 accounted in books.)
3. Total Provision
Current Tax on Taxable Income = 674000*40%= 269600
Deferred Tax Liability = -(16000)
Net Tax Provision= 253600
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