Question

Recording Multiple Temporary Differences

The records of Anderson Inc. provide the following information for the tax year 2020.

• There was no beginning balance in deferred tax account(s).
• Taxable income for 2020 was $168,000.
• Tax rate is 25%.
• Three temporary differences were identified:
  • Estimated litigation accrual of $56,000, not deductible for tax purposes. Settlement not expected to take place until 2022.
  • Excess of accelerated depreciation over GAAP depreciation of $33,600 caused a difference in the $140,000 GAAP basis and the 106,400 tax basis of equipment. One-third of the difference will reverse in 2021.
  • Unrealized holding gain on equity securities of $9,800 not recognized for tax purposes. Anderson Inc. intends to sell the security in early 2021. The investment (accounted for under FV-NI) is reported at its fair value of $28,000 at year-end in its financial statements.
• a. Record the income tax journal entry on December 31, 2020
• b. Record the income tax journal entry on December 31, 2021, assuming taxable income of $350,000.

Answer 1

Answer :

(a).

Journal Entry
Date	Accounts and Explanation	Debit	Credit
Dec 31.2020	Income tax expense	$38,850
	Deferred tax assets	14,000
	Deferred tax liability		$10,850
	Income tax payable		42,000
	(To record income tax payable)

(b).

Journal Entry
Date	Accounts and explanation	Debit	Credit
Dec.31.2021	Income tax expense	$82,250
	Deferred tax liability	5250
	Income tax payable		87,500
	(To record income tax payable)

Working Note :

For the year ending Dec 31.2020
Taxable income	$168,000
Tax rate	25%
Income tax payable	Taxable income*Tax rate
	$168,000 * 25%
	$42,000
Future Deductible amount
Litigation accrual	$56,000
Therefore,
Deferred tax asset	56000*25%
	$14,000
Future taxable amount
Depreciation	$33,600
Unrealized gain on equity
Securities	$9,800
Total	$43,400
Therefore
Deferred tax liabilities	43,400*25%
	$10,850
Income tax expenses	Income tax payable + change in deferred tax liabilities balance - change in deferred tax asset balance
	42,000 + 10850 -14000
	$38,850
For the year ending Dec 31.2021
Taxable income	$350,000
Tax rate	25%
Income tax payable	Taxable income*tax rate
	$350,000*25%
	$87,500
Closing balance of future taxable amount
Balance after 1/3rd reversal of depreciation and realisation of gain on equity
Depreciation	33600*2/3
	22400
Deferred tax liability	22400*25%
	5600
Change in deferred tax liability = Closing balance + Beginning balance
	=$5600 - $10850
	$(5,250)
Change in deferred tax assets = Closing balance - Beginning balance
	$14000 - $14000
	0
Income tax expenses	Income tax payable + Change in deferred liabilities balance - change in deferred tax assets balance
	$87,500 + (5250) - 0
	87500 - 5250
	82250

Kindly Up-vote Thank You !!!