In its first year of operations, Backyard Preschool Books had $60,000 of financi
ID: 2548969 • Letter: I
Question
In its first year of operations, Backyard Preschool Books had $60,000 of financial accounting (GAAP) income. Financial income and taxable income was identical except for the treatment of $5,000 in bad debt expense. The bad debt expense was deducted in determining the $60,000 financial accounting income, but is not deductible until the following year for taxable income.
1. Assuming a 40% tax rate, determine the amount of income taxes payable to the IRS for the current year.
2. What is the year-end balance in the deferred tax account? Is it a deferred tax asset or a deferred tax liability?
Explanation / Answer
SOLUTION
(1) Income taxes payable = $26,000
(2) Deferred tax = $5,000 * 40% = $2,000
It is a deferred tax asset because taxable income of the current year is higher than the financial income and the tax deduction in the following year is a future tax benefit of the company.
Particulars Amount ($) Income 60,000 Add: Bad debt expense 5,000 Total income (A) 65,000 Tax rate (B) 40% Income tax payable (A*B) 26,000Related Questions
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