Question

The Company’s first year of operations results in the following data:

Pretax accounting income $ 200

Traffic fines included in pretax accounting income (not deductible for tax purposes) 10

Depreciation expense included in pretax accounting income 30 Depreciation for tax purposes 110

The tax rate is 20%.

The Company should record A) Income taxes payable of $42. B) Income taxes payable of $16. C) Income taxes payable of $26. D) Tax benefit of $10 due to the traffic fine.

Which of the following will the Company disclose related to the income tax expense?

A) Only current portion of tax expense of $26.

B) Only total tax expense of $42.

C) Both current portion of the tax expense of $26 and deferred portion of the tax expense of $16.

D) None of these choices are correct.

So I know the answers are both C but I don't understand why total tax expense is $42 rather than $40. I also don't understand why the deferred portion of tax expense is $16 rather than $14. Thanks.

Answer 1

Pretax accounting income =200

Taxable income for tax purposes = 200+10+30-110 =$130

Taxes payable = 130*20% =$26

Hence, the answer is C

Since traffic fines are not deductible for tax purposes, it represents permanent difference and not timing difference as it will never be allowed

Deferred tax is calculated only for the timing differences and not for permanent differences as they will never be reversed.

Hence, deferred tax = (110-30)*20% =$16

And hence, total tax = $26+16=$42