Question

The Home Depot reported earnings from continuing operations before the provision for income taxes of $6,068 million for the year ending January 29, 2012, in its 10-K. Footnote 6 revealed that the provision for income taxes was $2,185 million and that the current amount paid to the federal, state, and foreign governments was $1,950 million.

1. Compute the earnings from continuing operations after taxes.

2. Prepare the journal entry to record taxes on ordinary activities. Omit explanation.

3. Explain why the amount of income taxes paid to the government was not the same as the amount of income taxes recorded on the income statement.

Answer 1

1. Earnings from Continuing operations after tax:

Earning before IncomeTax - Provision for Income Tax

= $6,068 MN - $2,185 MN

= $3,883 Million

2. Journal Entry to record Taxes:

Debit Income Statement A/c $2,185MN

Credit Provision for Tax A/c $2,185MN

3. It is usually observed that provision for Income tax and Income tax actually paid to government are different. Difference can be due te temporary difference between Accounting Income and Taxable Income.

Taxable Income is calculated using the Tax laws hence there may be an extra % of allowability of expenditure or No allowability of any accounting expenditure under Tax laws.

Also, the depreciation method is different under both Accounting rules and Tax laws rules.

Hence to effect this temporary difference, company has to prepare Deferred tax assets/ Deferred tax liabilities account which is nothing but sometimes a difference between Provision for Tax and the Actual payment of tax.