Question

The records of the Drori Corporation provided the following summarized data for 2017 (its first year of operations) and 2018: Income Statement for Years Ended on: Dec 31, 2017 Dec 31, 2018 Revenues $ 210,000 $ 218,000 Expenses (excluding income taxes) 120,000 133,000 Pre-tax income $ 90,000 $ 85,000 Additional information: 1. Assume that the income tax rate is 30%, and that 80% of income taxes payable are paid in the current year and 20% on April 15 of the next year. 2. The only temporary differences were: (i) The 2017 tax return includes a $10,000 expense that will be reported in the 2018 financial statements; (ii) The financial statements for 2018 include a $7,000 revenue that is taxable only in 2019. 3. There could be permanent differences in each one of the years. 4. Taxable income shown in the tax returns was $80,000 for 2017 and $85,000 for 2018. Required: a. For each year compute: (i) income taxes payable and (ii) deferred income tax. Provide the journal entries for each year to record income tax expense and payment. Is each deferred income tax a liability or an asset? Explain. b. Show what amounts related to income taxes should be reported each year on the income statement, the balance sheet, and the statement of cash flows.

Answer 1

Answer
(a) Computation of Income tax Payable by Drori Corporation for the fiscal years ended 31 Dec 2017 & 2018
Sl No	Particulars	Dec 31, 2017	Dec 31, 2018
1	Revenue	210000	218000
2	Expenses (other than tax)	120000	133000
3	Pretax income (1-2)	90000	85000
	Add: Expense of 2017 reported in year 2018	10000
	Less: Expense of 2017 reported in year 2018		10000
	Less: Revenu taxable only in 2019		7000
5	Taxable income	100000	68000
6	Tax Liability (30% of 5)	30000	20400
7	Tax Payable in current fiscal year (80% of 5)	24000	16320
8	Tax Payable in 15th April of next fiscal year (20% of 5)	6000	4080
(b) Computation of Deferred Income tax of Drori Corporation for the fiscal years ended 31 Dec 2017
Note: Deferred tax is calculated only on timing differences. Permanent differences shall not be taken into consideration.
Sl No	Particulars	Dec 31, 2017
1	Timing defference	10000
2	Deferred Tax Income (30% of 1)	3000
1. Since expense of the current year is reported in next year, we are paying tax on 10,000$ in 2017.
2. That is, $ 3000 has been paid in advance. Therefore, there arises a differred tax asset.
3. This timing difference will get reversed in the next year.
(c) Computation of Deferred Income tax of Drori Corporation for the fiscal years ended 31 Dec 2018
Sl No	Particulars	Dec 31, 2018
1	Timing defference - revenue of 2018 taxable in 2019	7000
2	Deferred tax expense	2100
3	Add: Reversal of 2017 deferred tax income	3000
4	Deferred tax asset	5100
1. Since income of the current year is reported in next year, we are deferring the tax liability on 7,000$ to 2019.
2. That is, $ 2100 has been defferd to next fiscal year. Therefore, there arises a deferred tax liability.
(d) Computation of Deferred Income tax of Drori Corporation for the fiscal years ended 31 Dec 2018
Sl No	Particulars	Dec 31, 2017	Dec 31, 2018
1	Tax on Accounting Profit	27000	25500
2	Deferred Tax Income	3000
3	Deferred Tax Expense		5100
4	Tax as per Tax records (i.e tax liability)	30000	20400
(d) Accounting entries for recording income tax liability and payment the fiscal years ended 31 Dec 2017
Sl No	Particulars	Debit	Credit
1	Income Tax Expense A/c Dr	30000
	To Income tax payable A/c		30000
	(Being income tax expense accounted)
2	Income tax payable a/c Dr	24000
	To Cash A/c		24000
	(Being 80% of tax liability paid)
(d) Accounting entries for recording income tax liability and payment the fiscal years ended 31 Dec 2018
Sl No	Particulars	Debit	Credit
1	Income tax payable a/c Dr	6000
	To Cash A/c		6000
	(Being 20% of tax liability of 2017 paid in April 2018)
2	Income Tax Expense A/c Dr	20400
	To Income tax payable A/c		20400
	(Being income tax expense accounted)
3	Income tax payable a/c Dr	16320
	To Cash A/c		16320
	(Being 80% of tax liability paid)
(e) Income tax and Deferred tax disclosure in Income statement, balance sheet and Cash Flow statement
Sl No	Particulars	Dec 31, 2017	Dec 31, 2018
Income Statement
	Income tax	27000	25500
	Deferred tax income	3000
	Deferred tax expense		5100
Balance sheet
	Income tax payable	6000	4080
	Deferred tax Asset	3000
	Deferred tax Liability		2100

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