Question

Winter Gear, Inc. started business on January 1, 20X1. The company uses the income statement approach to estimating bad debts. The company incorrectly used the actual write-off of the receivable for the recorded bad debt expense in the below income statement.

Credit sales	$678,000
Bad debt expense as a percentage of sales	2%
Write-off of accounts receivable	$1,000
Tax rate	30%
Estimated tax payment	$31,000

Incorrect income statement, for the year ended December 31:

Sales	$678,000
Expenses	549,200
Bad debt expense	1,000
Pretax income	127,800
Tax expense	38,340
Net income	89,460

Assuming estimated tax payment of $31,000 what is ending balance in taxes payable in 20X1 on the balance sheet?

Answer 1

Particulars	Amount	Particulars	Amount
Tax payment	38,340	Tax Payable	31,000
		Balance c/d	7340
Total	38,340	Total	38340

Closing Balance is deferred tax asset of 7340

This is arrived at as actual Tax Payment compared to the actual Tax liability. The payment being more than the actual liability due the IRS implies we have paid in excess, and thus we have an asset (upfront Payment) on future tax Liabilities.

Explanation:

Taxes Payable is a function of the operating Profit of the company

And operating profit (Also referred to as Earnings Before Tax - EBT) is arrived at by deducting from sales all related expenses as well as Costs of Goods sold and adding other income received within the Period under review

In the case of Winter Gear Inc. related expense charged against sales in arriving at the Business EBT includes Expenses and Bad debt expense.