Question

the comparative statements of earnings of Martin Corporation for fiscal years 2020 and 2021 showed the following summarized pretax data

	2020	201
sales revenue	$55,000	63,000
expenses ( excluding income taxes)	39,000	43,000
pretax earnings	16,000	20,000

the expenses in 2020 included an amount of $4000 that was deductible for tax purposes in 2021. The average income tax rate was 32 percent. Taxable income from the income tax returns was $20,000 for 2020 and $16,000 for 2021.

Required

a. for each year, compute (a) the income taxes payable and (b) the deferred income tax. is the deferred income tax a liability or asset? explain

b. show what amounts related to income taxes should be reported each year on the statement of earnings and the statement of financial position. assume that the income tax is paid March 1 of the next year

c. explain why income tax expense is not simply the amount of cash paid during the year

Answer 1

Ans-1-(a)

Ans-1-(b)

In 2020 Book Profit is less than Tax Profit hence there is Deferred tax Asset of 1280 i.e. (6400-5120)

As the deduction disallowed will be available in 2021

In 2021 the sitiation is reverse , Book Profit is greater than Tax Profits and hence we have deferred tax liability of 1280 i,e (6400-5120)

Ans-2

Ans-3

There is always a difference betwewn Business definitation and Tax definition of allowable / deductible expenses.Because of this there will always be difference between the Tax expense calculated on book profits and actual tax payable as per IT rules.Thus cash paid for tax is not same as Income Tax expense.