M Chapter 16 Examination x OFuture Lik c b ez o.mheduca /hm.tpx on.com Zekany Co
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M Chapter 16 Examination x OFuture Lik c b ez o.mheduca /hm.tpx on.com Zekany Corporation would have had identical income before taxes on both its income tax returns and income statements for the years 2013 through 2016 except for differences in depreciation on an operational asset. The asset cost $280,000 and is depreciated for income tax purposes in the following amounts: 2013 92,400 2014 23.200 2015 42.000 2016 22,400 The operational asset has a four-year life and no residual value. The straight-line method is used for financial reporting purposes. ur years were follows 2013 2014 2015 2016 Accounting income before taxes and depreciation $150,000 $170,000 $160,000 $160,000 Assume the average and marginal income tax rate for 2013 and 2014 was 30%; however, during 2014 tax legislation was passed to raise the tax rate to 40% beginning in 2015. The 40% rate remained in effect through the years 2015 and 2016. Both the accounting and income tax periods end December 31 Required: Prepare the journal entries to record income taxes for the years 2013 through 2016. (lf no entry is required for a particular transaction, select "No journal entry required" in the first account field.) View general journa view transaction list Date General Journal Debit Cred Dec 31, 2013 Income tax expense Deferred tax liability Income tax payable Dec 31, 2014 Income tax expense Deferred tax liability Income tax payable Dec 31, 2015 Income tax expense Deferred tax liability Income tax payable Dec 31, 2016 Income tax expense Deferred tax liability Income tax payableExplanation / Answer
WN-1 Calculation of Deferred Tax Assets and Liabilities
GAAP Reporting
Particular
2013
2014
2015
2016
Income before depreciation
150,000
170,000
160,000
160,000
Depreciation
70,000
70,000
70,000
70,000
Pre Tax Financial Income
80,000
100,000
90,000
90,000
Tax Rate
30 %
30 %
40 %
40 %
Income Tax Expense
24,000
30,000
36,000
36,000
Tax Reporting
Particular
2013
2014
2015
2016
Income before depreciation
150,000
170,000
160,000
160,000
Depreciation
92,400
123,200
42,000
22,400
Taxable Income
57,600
46,800
118,000
137,600
Tax Rate
30 %
30 %
40 %
40 %
Income Tax Expense
17,280
14,040
47,200
55,040
Comparison
Particular
2013
2014
2015
2016
Income Tax Expense (GAAP)
24,000
30,000
36,000
36,000
Income Tax Payable ( IRS)
17,280
14,040
47,200
55,040
Difference
6,720
15,960
11,200
19,040
Nature
Deferred Tax Liability
Deferred Tax Liability
Deferred Tax Assets ( Reduction in DTL)
Deferred Tax Assets ( Reduction in DTL)
Date
General Journal
Debit
Credit
Dec 31, 2013
Income Tax Expense
24,000
Deferred Tax Liability
6,720
Income Tax Payable
17,280
Dec 31, 2014
Income Tax Expense
30,000
Deferred Tax Liability
15,960
Income Tax Payable
14,040
Dec 31, 2015
Income Tax Expense
36,000
Deferred Tax Liability
11,200
Income Tax Payable
47,200
Dec 31, 2016
Income Tax Expense
36,000
Deferred Tax Liability
11,480
Income Tax Payable
55,040
Note – (‘1) On Dec 31,2015 Deferred tax assets will not be created but to the extent deferred tax liability will be reversed.
(‘2) – Balance of deferred tax liability at the end of year Dec 31,2016 will be reversed.
Balance benefit of $ 7560 ( 19040-11480) will not be created as deferred tax assets , as this is due to permanent difference on account of change in rate of taxation.
Depreciation claimed till 2014 (IRS)
215,600
Depreciation claimed (GAAP)
140,000
Balance
756,600
Deferred tax Asset due to permanent difference ( 756,000 x 10 %)
7,560
As this is due to permanent difference it will not be recognised.
Particular
2013
2014
2015
2016
Income before depreciation
150,000
170,000
160,000
160,000
Depreciation
70,000
70,000
70,000
70,000
Pre Tax Financial Income
80,000
100,000
90,000
90,000
Tax Rate
30 %
30 %
40 %
40 %
Income Tax Expense
24,000
30,000
36,000
36,000
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