Question

Dixon Corporation complies with generally accepted accounting principles in accounting for income taxes. Dixon had pretax book income of $700,000 in 2015. One temporary difference originated in 2015. Specifically, Dixon had revenue from item R of $150,000 for financial reporting (book) purposes in 2015; for income tax purposes the $150,000 of revenue will be recognized as follows: $50,000 in 2015, $50,000 in 2016 and $50,000 in 2017. The tax law in effect as of 1-1-2015 specified a tax rate of 40%.

Dixon had pretax book income of $900,000 in 2016. As a result of a change in the tax law enacted in 2016, the income tax rate was changed to 60% (from 40%) beginning in 2017. That is, although the change in the tax rate was enacted into law in 2016, it only changed the tax rate to 60% for 2017 and beyond.

Assume that the revenue of $150,000 was recognized for book and tax purposes as originally expected. The company had taxable income in all years and pretax book income in all years. The company expects to have taxable income in all years and pretax book income in all years.

What was income tax expense for Dixon for 2016 ?

Answer 1

Solution:

Computation of Income tax expense for 2016 - Dixon
Particulars	Amount
Pretax book income	$900,000.00
Add: Revenue from Item R	$50,000.00
Taxable income	$950,000.00
Tax rate	40%
Income tax payable for 2016	$380,000.00
Add: Deferred tax liability to be reversed for income recognized in 2016 for Item R	-$20,000.00
Add: Increase in deferred tax liability for change in tax rate ($50,000*20%)	$10,000.00
Income tax expense for 2016	$370,000.00