Question

The following facts relate to Headland Corporation.

1.		Deferred tax liability, January 1, 2020, $44,800.
2.		Deferred tax asset, January 1, 2020, $0.
3.		Taxable income for 2020, $106,400.
4.		Pretax financial income for 2020, $112,000.
5.		Cumulative temporary difference at December 31, 2020, giving rise to future taxable amounts, $268,800.
6.		Cumulative temporary difference at December 31, 2020, giving rise to future deductible amounts, $39,200.
7.		Tax rate for all years, 20%.
8.		The company is expected to operate profitably in the future.

Compute income taxes payable for 2020.

Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2020.

Prepare the income tax expense section of the income statement for 2020, beginning with the line “Income before income taxes.”

Answer 1

a)

Taxable income for 2020 = Taxable income * Tax rate

= $106,400*20%

= $21,280

b)

Particulars	Amount
Cumulative temporary differences giving rise to future taxable amount	$268,800.00
Required ending balance in deferred tax liability ($268,800*20%)	$53,760.00
Existing balance of deferred tax liability	$44,800.00
Deferred tax liability to be recorded for current year	$8,960.00
Temporary differences for current year giving rise to future taxable amount ($8,960/20%)	$44,800.00
Cumulative temporary differences giving rise to future deductible amount	$39,200.00
Required ending balance in deferred tax Assets (39,200*20%)	$7,840.00
Existing balance of deferred tax Assets	$0.00
Deferred tax assets to be recorded for current year	$7,840.00
Temporary differences for current year giving rise to future deductible amount ($7,840/20%)	$39,200.00

Date	Particulars	Debit	Credit
	Income Tax Expense	$22,400
	Deferred Tax Asset	$7,840
	Income Tax Liability(106,400*20%)		$21,280
	Deferred Tax Payable		$8,960

c)

Particulars		Amount
Income before taxes		$112,000.00
Less: Income tax expense:
Current Tax	$21,280.00
Deferred tax ($8,960 - $7,840)	$1,120.00
		$22,400.00
Net Income		$89,600.00

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