Question

The following facts relate to Sweet Corporation.

A.		Deferred tax liability, January 1, 2017, $67,200.
B.		Deferred tax asset, January 1, 2017, $22,400.
C.		Taxable income for 2017, $117,600.
D.		Cumulative temporary difference at December 31, 2017, giving rise to future taxable amounts, $257,600.
E.		Cumulative temporary difference at December 31, 2017, giving rise to future deductible amounts, $106,400.
F.		Tax rate for all years, 40%. No permanent differences exist.
G.		The company is expected to operate profitably in the future.

1. Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2017.

ACCOUNT TITLES	DEBIT	CREDIT

2. Compute the effective tax rate for 2017. __________ %

Answer 1

SOLUTION

1.

ACCOUNT TITLES	DEBIT ($)	CREDIT ($)
Income Tax Expense	62,720
Deferred Tax Asset *	20,160
Income Tax Payable ($117,600 *40%)		47,040
Deferred Tax Liability **		35,840

*Deferred tax Asset -

	Amount ($)
Deferred Tax asset at the end of 2017 ($106,400*40%)	42,560
Deferred Tax asset at the Beginning of 2017	22,400
Deferred tax asset for 2017	20,160

**Deferred tax liability -

	Amount ($)
Deferred Tax liability at the end of 2017 ($257,600*40%)	103,040
Deferred Tax liability at the Beginning of 2017	67,200
Deferred tax expense for 2017	35,840

2. Effective tax rate for 2017 = $62,720 / $117,600 = 53.34%