Question

During 2017, Solo Corporation reported Income before Depreciation and Income Tax of $800,000. Solo uses accelerated depreciation for income tax purposes and straight-line depreciation for financial accounting, there are no other differences between tax and accrual accounting. In 2017, Depreciation Expense was $120,000 on its GAAP based income statement and $160,000 for income tax purposes. Solo’s current income tax rate is 40%:

What amount of income tax expense would be reported on Solo’s 2017 income statement?

What amount of cash would be paid by Solo for income taxes in 2017?

When recording the income tax payment for 2017 in the accounting records, Solo would include a(n):

Increase in Deferred Tax Liability of $16,000

Decrease in Cash of $272,000

Increase in Income Tax Expense of $256,000

Increase in Deferred Tax Liability of $32,000

Answer 1

Solution:

Income tax expense to be reported in Solo's 2017 income statement = Pretax financial income * Tax rate = ($800,000 - $120,000) * 40% = $272,000

Amount of cash would be paid by Solo for income taxes in 2017 = Taxable income * tax rate = ($800,000 - $160,000) * 40% = $256,000

Deferred tax liability to be recorded = Income tax expense - Income tax payable = $272,000 - $256,000 = $16,000

When recording income tax payment for 2017 in the accounting records, Solo would include an Increase in Deferred Tax Liability of $16,000.

Hence first option is correct.