Question

At the end of the preceding year, Gonzales Industries had a deferred tax asset of $17,500, attributable to its only temporary difference of $50,000 for estimated expenses. At the end of the current year, the temporary difference is $45,000. At year-end, Gonzales Industries now estimates that it is more likely than not that one-third of the deferred tax asset will never be realized. Taxable income is $12,000 for the current year and the tax rate is 30% for all years. Required Show well-labeled supporting computations for each component of the journal to record Gonzales Industries' income tax expense for the current year, assuming that at the beginning of the year, the valuation allowance account for the deferred tax asset had a balance of $1,000.

Answer 1

Deferred tax asset is balance sheet item to reduce income tax for the current year. It is a current asset item under Assets side. Deferred taxes occur due to recognition of expenses or revenue at different time than that of the accounting standard. Deferred tax asset helps in tracking the tax liability in upcoming years.

The deferred tax asset and income tax is computed as:

Deferred tax asset = ( 45,000 * 30% ) – 17,500 = $ 4,000

Income tax payable = 12,000 * 30% = $ 3,600

Valuation allowance in deferred tax = 1/3 * 45,000 * 30% = $ 4,500

The valuation allowance already has balance of $ 1,000. Hence, $ 3,500 needs to be created. It will decrease the income tax for the current year.

The required journal entry for recording income tax expense would be as

Date	Particulars	Debit	Credit
	Income tax expense	$ 11,100
	Deferred Tax asset		$ 4,000
	Income tax payable		$ 3,600
	Valuable allowance		$ 3,500
	(To record income tax expense for the current year)

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