Question

Information pertaining Juniper Corporation is available for the year ended 2015, its first year of operations: :

Pretax financial income, $200,000.

Excess of tax deprecation over book depreciation equals $36,000 in 2015 (future taxable). This temporary difference (i.e., $36,000 depreciation expense) will be reversed as follows: $23,000 in 2016 and $13,000 in 2017.

The tax rates of 2015, 2016 and 2017 are 30%, 25%, and 25%, respectively.

Instructions:

(a) Compute Juniper’s 2015 taxable income.

(b) Prepare a schedule to show the derivation of the deferred tax liability at the end of 2015.

(c) Prepare the journal entry to record income tax expense, deferred income tax liability, and income taxes payable of Juniper for 2015.

Answer 1

Formula sheet

A	B	C	D	E	F
2
3		A deferred tax liability is created due to difference between taxable income and accounting income.
4		Current year deferred tax liability is calculating assuming the current tax rate and it is adjusted in future if tax rate changes.
5
6		Pretax financial income	200000
7		Excess of depreciation over book depreciation	36000
8
9		a)
10
11		Assuming that pretax financial inocme is as per the tax return.
12		The taxable income as per book will be higher than income as per tax return
13		as depreciation as per book is lower than the tax depreciation.
14
15		Pretax financial income	200000
16		Add: Excess of depreciation over book depreciation	36000
17		Taxable income	=D15+D16	=D15+D16
18
19		b)
20
21		Deferred tax liability is calculated as follows:
22		Deferred tax liability	= Excess of depreciation over book depreciation*Current Year Tax rate
23			=36000*30%
24			=36000*30%
25
26		Hence Deferred Tax Liability is	=D24
27
28		c)
29
30		Current Tax expense will be calculated using the taxable income as per tax return.
31
32		Pretax financial income	200000
33		Tax Rate	0.3
34		Income Tax expense- current	=D32*D33	=D32*D33
35
36		Deferred tax liability	=D26
37
38		Deferred Tax Liability Journal Entry:
39		Account	Debit	Credit
40		Tax Expense-current	=D34
41		Tax Expense-Deferred	=D36
42		Income Tax Payable		=D40
43		Deferred Tax Liability		=D41
44