Question

Use the information to answer all parts.

• Lyons Company deducts insurance expense of $210,000 for tax purposes in 2018, but the expense is not yet recognized for accounting purposes.
• In 2019, 2020, and 2021, no insurance expense will be deducted for tax purposes, but $70,000 of insurance expense will be reported for accounting purposes in each of these years.
• Lyons Company has a tax rate of 40% and income taxes payable of $180,000 at the end of 2018.
• There were no deferred taxes at the beginning of 2018.

a.     What is the amount of the deferred tax liability at the end of 2018?

b.     What is the amount of income tax expense for 2018?

c.     Assuming that income taxes payable for 2019 is $240,000, the income tax expense for 2019 would be what amount?

Answer 1

Option A) Deferred tax liability = 210000*40%=84000

Option B) Income tax expense = Deferred tax liability + Income tax payable

Income tax expense for 2018 = 84000 + 180000 = 264000

Option C) Income tax expense for 2019

Reversal of deferred tax liability will arise

Since 70000 of insurance expenses has been already allowed in previous year, now additional tax is to be paid 70000*40%=28000

Income tax expense =Income tax payable -reversal of deferred tax liability

Income tax expense =240000-28000=212000