You are the new accounting manager at the Barry Transport Cormpany. Your CFO has

Question

You are the new accounting manager at the Barry Transport Cormpany. Your CFO has asked you to provide input on the company's income tax position based on the following 1 Pretax accounting income was $30 million and taxable income was $8 million for the year ended December 31, 2016. 2.The difference was due to three items a. Tax depreciation exceeds book depreciation by $20 million in 2016 for the business complex acquired that year. This amount is scheduled to be $40 million in 2017 and to reverse as ($30 million) and ($30 million) in 2018, and 2019, respectively. b. Insurance of $6 million was paid in 2016 for 2017 coverage. c. A $4 million loss contingency was accrued in 2016, to be paid in 2018. 3. No temporary differences existed at the beginning of 2016 4.The tax rate is 40%. Required: 1. Determine the amounts necessary to record income taxes for 2016 and prepare the appropriate journal entry (if no entry is required for a trensaction/event, select "No al entry required in the first account field. Enter your answers in millions rounded to i decimal place (i. e, 5,500,000 should be entered as 5.5).) View transaction list Vew jourenal entry morlcsbeet No Evemt General Journal Debit Credit Income tax expense Deferted tay asset Deferred tax liabity ncome tax payable

Explanation / Answer

1-The following case will be solved as per the guidance of accounting standard relating to defered taxation.

Since the accounting income is more than taxable income there will be defered tax liability on overall basis.Because lesser tax will be paid in this year leading to higher taxes in the future years.

a-excess depriciation of 20 lakhs will attract deferred tax liability as per priciple stated above.

dtl=20*40/100=8 million

b-insurance expenditure will be allowed in the year to which it relates.therefore there will be disallowance now which will lead to increase income and more income and hence now dta will arise as lesser taxes will be paid in the future.

dta=6*40/100=2.4million

c-loss contigency will be allowed in the current year only for the tax purpose as it has accrued in the current year hence dtl will arise because for accounting it will be ignored hence later on there will be more taxes as for tax purpose there will be no disallowance.

dtl=4*40/100=1.6million

particulars debit credit

Income tax expense(8*40/100)= 3.2

DTL(8+1.60) 9.6

DTA 2.4

INCOME TAX PAYABLE(9.6+3.2-2.4) 10.4

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