The following facts relate to Duncan Corporation: 1. Deferred tax liability, Jan

Question

The following facts relate to Duncan Corporation:
1. Deferred tax liability, January 1, 2014, $60,000.
2. Deferred tax asset, January 1, 2014, $20,000.
3. Taxable income. for 2014, $105,000.
4. Cumulative temporary difference at December 31, 2014, giving rise to future taxable amounts, $230,000.
5. Cumulative temporary difference at December 31, 2014, giving rise to future deductible amounts, $95,000.
6. Tax rate for all years, 40%. No permanent differences exist.
7. The company is expected to operate profitably in the future.

Instructions:
A. Compute the amount of pretax financial income for 2014.
B. Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2014.
C. Prepare the income tax expense section of the income statement for 2014, beginning with the line, "Income before income taxes."
D. Compute the effective tax rate for 2014.

Explanation / Answer

A. CALCULATION OF AMOUNT OF PRETAX FINANCIAL INCOME FOR 2014

TAXABLE INCOME FOR 2014=$1,05,000

DTL ON JAN 1,2014=$60,000

CUMULATIVE TEMPORARY DIFFERENCE AT DEC 31,2014=$2,30,000

DTL FOR 2014=$2,30,000-$60,000=$1,70,000

DTA ON JAN 1,2014=$20,000

CUMULATIVE TEMPORARY DIFFERENCE AT DEC 31,2014=$95,000

DTA FOR 2014=$95,000-$20,000=$75,000

PRETAX FINANCIAL INCOME=TAXABLE INCOME+DTL-DTA

=$1,05,000+$1,70,000-$75,000

=$2,00,000

B.INCOME TAX EXPENSE A/C DR $1,05,000

   TO PROFIT AND LOSS APPROPRIATION A/C $ 1,05,000

(BEING INCOME TAX RECORDED)

DEFFERED TAX A/C DR $95,000

TO PROFIT AND LOSS A/C $95,000

(BEING DEFFERED TAX RECORDED)

C.INCOME TAX EXPENSE SECTION OF INCOME STATEMENT FOR 2014

INCOME BEFORE INCOME TAXES XXX

LESS:INCOME TAX:

DEFFERED TAX XXX

CURRENT TAX XXX    XXX

INCOME AFTER INCOME TAX XXX

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