Question

Two independent situations are described below. Each situation has future deductible amounts and/or future taxable amounts produced by temporary differences.

Situation 1 2 Taxable income $40,000 $80,000 Amounts at year-end: Future deductible amounts 5,000 10,000 Future taxable amounts –0– 5,000 Balances at beginning of year: Deferred tax asset 1,000 4,000 Deferred tax liability –0– 1,000

The enacted tax rate is 25% for both situations. Determine the income tax expense for the year.

Situation 1

Situation 2

a.$10,000$20,000

b.$9,750$21,750

c.$5,000$17,000

d.$0$0

Answer 1

Solution:

Situation 1:

Required deferred tax assets at the end of year = $5,000*25% = $1,250

Beginning balance of deferred tax assets = $1,000

Deferred tax assets to be created during the year = $1,250 - $1,000 = $250

Income tax payable for the year = $40,000*25% = $10,000

Income tax expense for the year = Income tax payable - Deferred tax assets recognized during the year

= $10,000 - $250 = $9,750

Hence option b is correct.

Situation 2:

Required balance of deferred tax assets at the end of year = $10,000*25% = $2,500

Required balance of deferred tax liability at the end of year = $5,000*25% = $1,250

Deferred tax assets balance at beginning = $4,000

Deferred tax liability balance at beginning = $1,000

Deferred tax liability to be recognized during the year = $1,250 - $1,000 = $250

Deferred tax assets to be reversed during the year = $4,000 - $2,500 = $1,500

Income tax payable = $80,000*25% = $20,000

Income tax expense for the year = $20,000 + $250 + $1,500 = $21,750

Hence option b is correct.