Question

Thompson Industries’ 2016 income statement had pretax financial income of $250,000. Thompson uses an accelerated cost recovery method on its tax return and straight-line depreciation for financial reporting. The differences between the book and tax deductions for depreciation over the five-year life of the assets acquired in 2016 and the enacted tax rates for 2016 to 2020 are as follows: Book Over (Under) Tax Tax Rates 2016 $(50,000) 35% 2017 (65,000) 30% 2018 (15,000) 30% 2019 60,000 30% 2020 70,000 30% What will Thompson report as noncurrent deferred income tax liability and income taxes currently payable on their December 31, 2016 balance sheet?

Answer 1

Solution :

Thompson Industries :

The income tax laibility and deferred tax liability to be presented on the balance sheet date 31st Dec 2016 :

1. Deferred income tax liability (DTL) : This is the tax effect due to the timing difference between the company's accounting and tax carrying values. In this case the difference for 2016 is 50,000 . Hence, DTL is 35% of 50,000 is $ 17,500

2. Income tax payable : Is the tax expense that needs to be provided in the books as per tax return. Given the company's pretax financial income is 250,000 , a further 50,000 deduction would be availed by the company in the tax return. Hence the taxable income for 2016 would be 200,000 and the income tax payable would be 35% on 200,000 i.e $ 70,000