Taxable income: Income which is earned over and above the permissible limit is considered taxable income. In other words, earnings that are eligible for tax computation after allowing or deducting eligible legal deductions is termed taxable income. Deferred tax asset : The process of paying over and above the required level of tax is termed deferred tax asset. These taxes are calculated and paid on the future expected income. In case the future expected inflow of cash reduces, the company can claim the excess tax paid in the form of tax relief or refund. Deferred tax liability : Some business activities may create a dissimilarity between the amount recorded in the books and the taxable income. These differences create deferred tax liability. For example, Mr. J is a car dealer who sold a car on installment. The actual sale happened in the current year but the benefits are receivable in the future years. This creates a difference in the books of accounts and the taxable account. (a) To prepare: To prepare the taxable income for the year 2017. Given information: Taxes payable for the year 2017 is $320,000. Rate of tax for the year 2017 is 40%. Explanation: Now, compute the taxable income for the year 2017. Taxable income for the year 2017 = Taxes payable for the year 2017 Tax rate 2017 = $ 320 , 000 40 % = $ 800 , 000 Conclusion: Therefore, the total taxable income for the year 2017 is $800,000. (b) To prepare: To prepare the pretax financial income for the year 2017. Given information: Taxable income for the year 2017 is $800,000. Excess depreciation for the year 2017 is $120,000. Municipal interest for the year 2017 is $10,000. Unearned rent for the year 2017 is $10,000. Explanation: Now, compute the pretax financial income for the year 2017. Particulars Amount ($) Taxable income 800,000 Add: Excess depreciation charged Municipal interest 120,000 10,000 Less: Unearned rent 10,000 Pretax financial income 890,000 Conclusion: Therefore, the pretax financial income for the year 2017 is $890,000. (c) To prepare: To prepare and record the income tax expense-related transactions in the journal entry . Given information: Unearned rent of the year 2017 is $40,000. Excess depreciation shown in the statement is $120,000. Income tax payable is $320,000. Now, compute the deferred tax asset. Deferred tax asset = Unearned rent × Income tax rate of 2017 = $ 40 , 000 × 35 % = $ 14 , 000 Now, compute the deferred tax liability. Deferred tax liability = Excess Depreciation × Income tax rate of 2017 = $ 120 , 000 × 35 % = $ 42 , 000 Solution: Now, pass the journal entry for the year 2017 to record the income tax expense. Particulars Debit Credit Income tax expense 348,000 Deferred tax asset 14,000 Tax payable for the year 2017 320,000 Deferred tax liability 42,000 (Being the income tax expense calculated and debited) Explanation: Income tax expense is a nominal account. It is an expense to the company and it is debited. Deferred tax asset decreases the tax payable, therefore it is debited. Tax payable for the year is credited to compute the actual income tax expense. Deferred tax liability increases the amount of tax payable, and therefore it is credited. Conclusion: Thus, the income tax expense for the year 2017 is $348,000. (d) To prepare: To prepare and record the income tax expense-related transactions in the journal entry. Given information: Unearned rent of the year 2018 is $20,000. Excess depreciation shown in the statement is $90,000. Income tax payable is $980,000. Now, compute the deferred tax asset. Deferred tax asset = Unearned rent × Income tax rate of 2018 = $ 20 , 000 × 35 % = $ 7 , 000 Now, compute the deferred tax liability Deferred tax liability = Excess Depreciation × Income tax rate of 2017 = $ 90 , 000 × 35 % = $ 31 , 500 Solution: Now, pass the journal entry for the year 2018 to record the income tax expense. Particulars Debit Credit Income tax expense 339,500 Deferred tax asset 10,500 Tax payable for the year 2018 343,000 Deferred tax liability 7,000 (Being the income tax expense calculated and debited) Explanation: Income tax expense is a nominal account. It is an expense to the company and it is debited. Deferred tax asset decreases the tax payable, therefore it is debited. Tax payable for the year is credited to compute the actual income tax expense. Deferred tax liability increases the amount of tax payable, and therefore it is credited. Conclusion: Thus, the income tax expense for the year 2018 is $339,500. (e) To prepare: To prepare the income tax expense for the year 2017. --> Given information: Income before income taxes is $890,000. Income tax expense for the current year is $320,000. Deferred tax liability is $42,000. Deferred tax asset is $14,000. Now, calculate the deferred tax expense for the year 2017. Deferred tax expense = Deferred tax liability − Deferred tax asset = $ 42 , 000 − $ 14 , 000 = $ 28 , 000 Explanation: Now, compute the Income tax expense for the year 2017. Particulars Amount ($) Income before taxes 890,000 Less: Current year tax payable Deferred tax expense 320,000 28,000 Net income 542,000 Conclusion: Thus, the net income of the year 2017 is $542,000.

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