Question

Calculating and Reporting Income Tax Expense

Lynch Company began operations in 2016. The company reported $22,000 of depreciation expense on its income statement in 2016 and $24,000 in 2017. On its tax returns, Lynch deducted $34,000 for depreciation in 2016 and $39,000 in 2017. The 2017 tax return shows a tax obligation (liability) of $18,200 based on a 40% tax rate.

Required
a. Determine the temporary difference between the book value of depreciable assets and the tax basis of these assets at the end of 2016 and 2017.

2016	$Answer
2017	$Answer

b. Calculate the deferred tax liability for each year.

2016	$Answer
2017	$Answer

c. Calculate the income tax expense for 2017.
$Answer

Answer 1

• All working forms part of the answer
• Working for all the answer:

	Accounting	Income Taxes	Temporary Difference	Deferred Tax expense
	[A]	[B]	[C = B – A]	[D = C x 40% tax rate]
2016 Depreciation expense	$       22,000.00	$                34,000.00	$                12,000.00	$ 4,800.00
2017 Depreciation expense	$       24,000.00	$                39,000.00	$                15,000.00	$ 6,000.00

• Requirement (a)

Temporary Differences:

2016	$       12,000.00
2017	$       15,000.00

• Requirement (b)

Deferred Tax liability balance

2016	$          4,800.00
2017	$       10,800.00   [ 4800 + 6000]

• Requirement (c)

Income Tax expense for 2017

Income Tax Payable	$       18,200.00 [given]
Deferred Tax expense 2017	$          6,000.00 [calculated in working]
Income Tax expense for 2017	$       24,200.00 [ 18200 + 6000]