Question

Exercise 19-05 The following facts relate to Pearl Corporation.

1. Deferred tax liability, January 1, 2020, $21,600.

2. Deferred tax asset, January 1, 2020, $0.

3. Taxable income for 2020, $102,600.

4. Pretax financial income for 2020, $216,000.

5. Cumulative temporary difference at December 31, 2020, giving rise to future taxable amounts, $259,200.

6. Cumulative temporary difference at December 31, 2020, giving rise to future deductible amounts, $37,800.

7. Tax rate for all years, 20%.

8. The company is expected to operate profitably in the future.

1. Compute income taxes payable for 2020.

2. Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2020. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)
3. Prepare the income tax expense section of the income statement for 2020, beginning with the line “Income before income taxes.” (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Answer 1

Temporary difference arising during 2020 giving rise to future taxable amounts	151200	=259200-(21600/20%)
1
Taxable income	102600
X Tax rate	20%
Income taxes payable	20520
2
Account Titles and Explanation	Debit	Credit
Income tax expense	43200
Deferred tax asset	7560		=37800*20%
Deferred tax liability		30240	=151200*20%
Income taxes payable		20520
3
Income statement
For the year ended December 31, 2020
Income before income taxes		216000
Income tax expense
Current	20520
Deferred	22680
		43200
Net income/(loss)		172800