Question

The information that follows pertains to Julia Company:
(a.)	Temporary differences for the year 2016 are summarized below.
	Expenses deducted in the tax return, but not included in the income statement:
	Depreciation        $57,000
	Prepaid expense     7,700
	Expenses reported in the income statement, but not deducted in the tax return:
	Warranty expense    8,700
(b.)	No temporary differences existed at the beginning of 2016.
(c.)	Pretax accounting income was $63,700 and taxable income was $7,700 for 2016.
(d.)	There were no permanent differences.
(e.)	The tax rate is 30%.

Required:

Prepare the journal entry to record the tax provision for 2016. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

- Since Taxable Income is $7700 and tax rate is 30%, hence tax amount of $7,700 * 30% = $2,310 is payable.

- THere is a difference of $56,000 between accounting and taxable income which is completely due to temporary difference. In nutshell, Company is claiming an extra expense of $56,000 this year; hence company will have to create a deferred tax liability account with tax amount of temporary difference i.e. $56,000 * 30% = $16,800

Accounting entry will be as follows:

Debit Income Statement 19,110

Credit Provision for Income Tax 2,310

Credit Deferred tax liability 16,800