Question

Facts

Burger King is a cash-basis taxpayer but maintains its financial accounting records using full

accrual accounting. In the current year, the company sold a parcel of land resulting in a gain of

$10,000. However, the receivable will not be collected until next year at which time the gain will

be taxed.

Federal income tax law specifies a ‘graduated’ tax structure as follows:

The first $20,000 of income is taxed at a rate of 10%.

All income above $20,000 is taxed at a rate of 20%.

During the current year, Burger King had taxable income of $38,000. Next year, Burger King

anticipates that taxable income (after including the $10,000 gain) will be approximately $40,000.

Question

What tax rate should Burger King use in measuring (recording) deferred taxes on the $10,000

gain?

Required

1. Provide a brief written description of the proper tax rate to use in measuring deferred tax

expense for the current year.

Facts

Burger King is a cash-basis taxpayer but maintains its financial accounting records using full

accrual accounting. In the current year, the company sold a parcel of land resulting in a gain of

$10,000. However, the receivable will not be collected until next year at which time the gain will

be taxed.

Federal income tax law specifies a ‘graduated’ tax structure as follows:

The first $20,000 of income is taxed at a rate of 10%.

All income above $20,000 is taxed at a rate of 20%.

During the current year, Burger King had taxable income of $38,000. Next year, Burger King

anticipates that taxable income (after including the $10,000 gain) will be approximately $40,000.

Question

What tax rate should Burger King use in measuring (recording) deferred taxes on the $10,000

gain?

Required

1. Provide a brief written description of the proper tax rate to use in measuring deferred tax

expense for the current year.

Answer 1

First Understand what is Current Tax and Deferred Tax

Current Tax - Current tax is the amount of Income Tax determined to be payable in respect of taxable income for a period.

Deferred Tax - Deferred tax is the tax effect of the timing difference. The difference between the tax expenses (which is calculated on an accrual basis) and current tax liability to be paid for a particular period as per Federal Income Tax Law is called deferred tax (asset/liability). That is why Tax Expenses + Current Tax + Deferred Tax

on the basis of the above explanations the question has been solved below:-

Particulars	Amount
Current Year Income as per financial accounting	$        48,000
Current Year Taxable Income as Income Tax Laws	$        38,000
Current Year Tax Payable on Income Taxable under Federal Income Tax Laws	$          5,600
Current Year Tax Payable on Income as per financial accounting	$          7,600
Deferred Tax Asset to be recorded in Books of Accounts	$          2,000
Tax Rate to be used to record Deferred Tax Asset in Books	20%