Question

The following facts relate to Novak Corporation. 1. Deferred tax liability, January 1, 2017, $62,400. 2. Deferred tax asset, January 1, 2017, $20,800. 3. Taxable income for 2017, $109,200. 4. Cumulative temporary difference at December 31, 2017, giving rise to future taxable amounts, $239,200. 5. Cumulative temporary difference at December 31, 2017, giving rise to future deductible amounts, $98,800. 6. Tax rate for all years, 40%. No permanent differences exist. 7. The company is expected to operate profitably in the future. a. Compute the amount of pretax financial income for 2017. b. Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2017 c. Prepare the income tax expense section of the income statement for 2017, beginning with the line “Income before income taxes. d. Compute the effective tax rate for 2017

Answer 1

Deferred tax liabilities arises when there is future taxable amounts and deferred tax assets arises when there is future deductibility
a.
Calculation of pretax financial income for 2017
Cumulative future taxable amounts on 31/12/2017		$239,200
Cumulative future taxable amounts on 01/12/2017(62400/0.40)		$156,000
Difference in 2017 which will result in future taxable amounts		$83,200
Cumulative future tax deductible on 31/12/2017		$98,800
Cumulative future tax deductible on 1/12/2017 (20800/0.40)		$52,000
Difference in 2017 which will result in future tax deductible		$46,800
Taxable Income for 2017		$109,200
Add: Future taxable amount		$83,200
Less: Future tax deductible		-$46,800
Pretax financial Income for 2017		$145,600
The pretax financial income for 2017 is $145,600
b.
	Particulars	Debit	Credit
	Income tax expense	$58,240
	Deferred tax asset (46800*40%)	$18,720
	Income tax payable (109200*40%)		$43,680
	Deferred tax liability (83200*40%)		$33,280
c.	Novak Corporation
	Partial Income statement for year 2017
	Income before income taxes		145600
	Income tax expense
	Current	$43,680
	Deferred (33280-18720)	$14,560	$58,240
	Net income		$87,360
d.
Effective tax rate = 58240/145600
Effective tax rate	40.00%