1.
Temporary Difference
Temporary difference refers to the difference of one income recognized by the tax rules and accounting rules of a company in different periods. Consequently, the difference between the amount of assets and liabilities reported in the financial reports and the amount of assets and liabilities as per the company’s tax records, is known as temporary difference.
Multiple Temporary Difference
It is very unlikely to have a single temporary difference in any company. In that case, the same concept of temporary difference will be applicable for multiple temporary difference. In case of multiple temporary difference, we have to categorize all temporary difference into future taxable amount and future deductible amounts. The total amount of future taxable amounts multiplied by future tax rate will generate
To prepare: The appropriate journal entry to record the income taxes.
1.
Explanation of Solution
The journal entry to record the income taxes in the books is as follows:
Date | Account Titles and Explanation | Post Ref. |
Debit ($) (in millions) |
Credit ($) (in millions) |
|
2016 | |||||
Income Tax Expense (4) | 16.4 | ||||
2.4 | |||||
Deferred Tax Liability (1) | 15.6 | ||||
Income Tax Payable (3) | 3.2 | ||||
(To record income taxes) |
Table (1)
Working Notes:
Calculate the value of deferred tax liability
Calculate the value of deferred tax asset
Calculate the value of income tax payable
Calculate the value of income tax expenses
- Income Tax Expense is an expense account and it decreases the value of shareholders’ equity account. So, debit Income Tax Expense account with $16.4 million.
- Deferred tax asset is an asset and is increased by $2.4 million. Therefore, debit deferred tax asset account with $2.4 million.
- Deferred tax liability is a liability and is increased by $15.6 million. Therefore, credit deferred tax liability account with $15.6 million.
- Income Tax Payable is a liability account has increased because the taxable income has increased. So, credit Income Tax Payable account with $3.2 million.
2.
To show: how the deferred tax amounts classified in the classified
2.
Explanation of Solution
In the balance sheet all deferred tax liabilities, deferred tax assets and valuation allowances are treated as non-current items. If the deferred tax accounts belong to the same tax jurisdictions then, they are netted against each other and shown as a single number (after the adjustments) in the balance sheet. If deferred tax liability amount is more than deferred tax asset, then it will report as a liability. Similarly, it will report as an asset when deferred tax asset is more than deferred tax liability.
The following table shows the deferred tax liability to be reported in a classified balance sheet.
Related balance sheet account | Classification | Future tax deductible amount | Tax rate | Deferred tax (asset) / Liability | |
Current | Non-current | ||||
Loss contingency | Non-current | ($6) | × 40% | ($2.4) | |
30 | × 40% | 12 | |||
Prepaid insurance | 9 | × 40% | 3.6 | ||
Net current liability | 3.6 | ||||
Net non-current liability | 9.6 |
Table (2)
3.
The amount necessary to record income taxes for 2016 and prepare appropriate journal entry to record the income taxes.
3.
Explanation of Solution
Determine the amounts necessary to record income taxes for 2016
Current Year | Future Taxable (Deductible) Amounts | Deferred Tax | ||||
2016 | 2017 | 2018 | 2019 | Liability | Asset | |
Pretax accounting income | 41 | |||||
Temporary Differences: | ||||||
Depreciation | (30) | 30 | ||||
Prepaid Insurance | (9) | 9 | ||||
Future Tax rate | 40% | 35% | ||||
Deferred tax liability | 3.6 | 10.5 | 14.1 | |||
Loss Contingency | 6 | (6) | ||||
Future Tax rate | 35% | |||||
Deferred tax asset | 2.1 |
(2.1)
|
||||
Taxable Income | 8 | |||||
Tax rate | 40% | |||||
Income Tax payable | 3.2 (5) |
Table (3)
Compute deferred tax asset and deferred tax liability amount
Deferred tax liability (in million) |
Deferred tax assets (in million) |
|
Ending balance (current balance needed) | $14.1 | $2.1 |
Less: Beginning balance | $0 | $0 |
Change needed to achieve desired balance | $14.1 (6) | $2.1 (7) |
Table (4)
Calculate the value of income tax expenses
The journal entry to record the income taxes at the end of 2016 is as follows:
Date | Account Titles and Explanation | Post Ref. |
Debit ($) (in millions) |
Credit ($) (in millions) |
|
2016 | |||||
Income Tax Expense (8) | 15.2 | ||||
Deferred Tax Asset (7) | 2.1 | ||||
Deferred Tax Liability (6) | 14.1 | ||||
Income Tax Payable (5) | 3.2 | ||||
(To record income taxes) |
Table (5)
- Income Tax Expense is an expense account and it decreases the value of shareholders’ equity account. So, debit Income Tax Expense account with $15.2 million.
- Deferred tax asset is an asset and is increased by $2.1 million. Therefore, debit deferred tax asset account with $2.1 million.
- Deferred tax liability is a liability and is increased by $14.1 million. Therefore, credit deferred tax liability account with $14.1 million.
- Income Tax Payable is a liability account has increased because the taxable income has increased. So, credit Income Tax Payable account with $3.2 million.
Note:
When a portion of temporary difference is yet to generate in future period, we have to consider only the reversals of temporary difference at balance sheet date e.g., $ 30 for depreciation. Future temporary difference of depreciation has not taken into consideration. We assume that existing difference reverses in the first year after the difference no longer is originating (in this case year 2020). If we consider future originations of temporary difference then the deferred tax liability would be $7.5 million instead of $10.5 million.
Current Year | Future Taxable (Deductible) Amounts | Total | |||
2016 | 2017 | 2018 | 2019 | ||
Depreciation | (30) | (60) | 50 | 40 | |
Future Tax rate | 40% | 35% | 35% | ||
Deferred tax liability | (24) | 17.5 | 14 | 7.5 |
Table (6)
Want to see more full solutions like this?
Chapter 16 Solutions
INTERMEDIATE ACCOUNTING WITH AIR FRANCE-KLM 2013 ANNUAL REPORT
- Suppose you take out a five-year car loan for $14000, paying an annual interest rate of 4%. You make monthly payments of $258 for this loan. Complete the table below as you pay off the loan. Months Amount still owed 4% Interest on amount still owed (Remember to divide by 12 for monthly interest) Amount of monthly payment that goes toward paying off the loan (after paying interest) 0 14000 1 2 3 + LO 5 6 7 8 9 10 10 11 12 What is the total amount paid in interest over this first year of the loan?arrow_forwardSuppose you take out a five-year car loan for $12000, paying an annual interest rate of 3%. You make monthly payments of $216 for this loan. mocars Getting started (month 0): Here is how the process works. When you buy the car, right at month 0, you owe the full $12000. Applying the 3% interest to this (3% is "3 per $100" or "0.03 per $1"), you would owe 0.03*$12000 = $360 for the year. Since this is a monthly loan, we divide this by 12 to find the interest payment of $30 for the month. You pay $216 for the month, so $30 of your payment goes toward interest (and is never seen again...), and (216-30) = $186 pays down your loan. (Month 1): You just paid down $186 off your loan, so you now owe $11814 for the car. Using a similar process, you would owe 0.03* $11814 = $354.42 for the year, so (dividing by 12), you owe $29.54 in interest for the month. This means that of your $216 monthly payment, $29.54 goes toward interest and $186.46 pays down your loan. The values from above are included…arrow_forwardSuppose you have an investment account that earns an annual 9% interest rate, compounded monthly. It took $500 to open the account, so your opening balance is $500. You choose to make fixed monthly payments of $230 to the account each month. Complete the table below to track your savings growth. Months Amount in account (Principal) 9% Interest gained (Remember to divide by 12 for monthly interest) Monthly Payment 1 2 3 $500 $230 $230 $230 $230 + $230 $230 10 6 $230 $230 8 9 $230 $230 10 $230 11 $230 12 What is the total amount gained in interest over this first year of this investment plan?arrow_forward
- Hii expert please given correct answer general Accounting questionarrow_forwardOn 1st May, 2024 you are engaged to audit the financial statement of Giant Pharmacy for the period ending 30th December 2023. The Pharmacy is located at Mgeni Nani at the outskirts of Mtoni Kijichi in Dar es Salaam City. Materiality is judged to be TZS. 200,000/=. During the audit you found that all tests produced clean results. As a matter of procedures you drafted an audit report with an unmodified opinion to be signed by the engagement partner. The audit partner reviewed your file in October, 2024 and concluded that your audit complied with all requirements of the international standards on auditing and that; sufficient appropriate audit evidence was in the file to support a clean audit opinion. Subsequently, an audit report with an unmodified opinion was issued on 1st November, 2024. On 18th January 2025, you receive a letter from Dr. Fatma Shemweta, the Executive Director of the pharmacy informing you that their cashier who has just absconded has been arrested in Kigoma with TZS.…arrow_forwardNonearrow_forward
- AccountingAccountingISBN:9781337272094Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.Publisher:Cengage Learning,Accounting Information SystemsAccountingISBN:9781337619202Author:Hall, James A.Publisher:Cengage Learning,
- Horngren's Cost Accounting: A Managerial Emphasis...AccountingISBN:9780134475585Author:Srikant M. Datar, Madhav V. RajanPublisher:PEARSONIntermediate AccountingAccountingISBN:9781259722660Author:J. David Spiceland, Mark W. Nelson, Wayne M ThomasPublisher:McGraw-Hill EducationFinancial and Managerial AccountingAccountingISBN:9781259726705Author:John J Wild, Ken W. Shaw, Barbara Chiappetta Fundamental Accounting PrinciplesPublisher:McGraw-Hill Education