Chapter 19, Problem 4UJ

To determine

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.

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.

Pretax financial income: Income that is computed based on the records and documents presented by the individual, firm, or an entity is termed pretax financial income. Generally, the pretax financial income is the income which is eligible for computing or determining the net tax liability of the individual, firm, or an entity.

To determine and record the journal entry for the income tax expense.

Given information: Pretax financial income is $500,000.

Fines and penalties is $26,000 and tax exempted interest is $28,000.

Excess gross profit on installment is $448,000.

Rate of tax is 40%.