Question

Shaw Corporation reported pretax book income of $1,140,000. Included in the computation were favorable temporary differences of $215,000, unfavorable temporary differences of $201,000, and favorable permanent differences of $125,000. Compute the company’s deferred income tax expense or benefit.

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Answer 1

Pretax book income $1,140,000

Less: Favorable temporary differences ($215,000)

Add: Unfavorable temporary differences $201,000

Less: Favorable permanent differences ($125,000)

= TAXABLE INCOME 1001000

Current Income Tax Expense assuming Tax Rate to be 34%

= 1001000*34% = $340,340

Favorable temporary differences ($215,000)

Unfavorable temporary differences $201,000

Net Increse in favorable temporary differences = (14000)

Net increase in deffered income tax liability = (14000)*34% = $ 4760

The net increase in the deferred income tax liability is recorded as the company’s deferred tax expense in current year. Permanent differences do not affect deferred income tax.