Problem 13-2 Calculating the amount of temporary and permanent differences and tax entry (LO 13-2, LO...

Problem 13-2 Calculating the amount of temporary and permanent differences and tax entry (LO 13-2, LO 13-4, LO 13-8)

The following information pertains to Ramesh Company for the current year:


Book income before income taxes	$	106,000
Income tax expense		45,500
Income taxes due for this year		28,000
Statutory income tax rate		35	%

The company has one permanent difference and one temporary difference between book and taxable income.

Required:

Calculate the amount of temporary difference for the year and indicate whether it causes book income to be more or less than taxable income.

Calculate the amount of permanent difference for the year and indicate whether it causes book income to be more or less than taxable income.

Provide the journal entry to record income tax expense for the year.

Compute the effective tax rate (that is, income tax expense divided by book income before taxes).

Requirement 1 & 2

1. Calculate the amount of temporary difference for the year and indicate whether it causes book income to be more or less than taxable income.

2. Calculate the amount of permanent difference for the year and indicate whether it causes book income to be more or less than taxable income.


1.	Temporary difference arising during the year
	Is book income more or less than taxable income as a result?
2.	Permanent difference arising during the year
	Is book income more or less than taxable income as a result?

Requirement 3

Prepare the entry to record income taxes for the year.

Requirement 4

Effective tax rate

Solutions

Expert Solution

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Part -1

Income Tax Expense		$ 45,500
Less: Income Tax Dues		$ 28,000
Deferred Tax payable	a	$ 17,500
Tax Rate	b	0.35
Temporary Difference	a/b	$ 50,000
It is causing Book Income more than tax income since Income tax expense more than payable.


Part -2

Book Income before Income Tax		$ 106,000
Less: Temporary Difference		$ 50,000
Book Income after temporary diff	a	$ 56,000
Actual Taxable Income	b	$ 80,000
28000/0.35
Permanent Difference	b-a	$ 24,000

It is causing Book income to be lower from 80000 to 56000

Part -3
Income Tax Expense	$ 45,500
Deferred Tax Liability		$ 17,500
Income Tax Payable		$ 28,000

Part -4

Effective Tax Rate	28000/106000	26.42%

ekkarill92 answered 2 years ago

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