Question

Sarasota Corporation has one temporary difference at the end of 2020 that will reverse and cause taxable amounts of $56,400 in 2021, $61,800 in 2022, and $66,400 in 2023. Sarasota’s pretax financial income for 2020 is $278,300, and the tax rate is 30% for all years. There are no deferred taxes at the beginning of 2020.

Compute taxable income and income taxes payable for 2020.

Taxable income		$enter a dollar amount
Income taxes payable		$enter a dollar amount

Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2020. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)

Prepare the income tax expense section of the income statement for 2020, beginning with the line “Income before income taxes.”. (Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Answer 1

Deferred taxes arise from temporary differences or the difference between the accounting income and the taxable income excluding the permanent difference.

Deferred taxes are recorded in the balance sheet as an asset or liability depending on its impact.

 

Requirement 1 :

 

Taxable Income and Income Tax Payable for2020

Taxable Income	$93,700
Income Tax Payable	$28,110

Explanation;

Pre Tax Financial Income for 2020		$278,300
Temporary difference resulting in future taxable Amount in
2021	$(56,400)
2022	$(61,800)
2023	$(66,400)	$(184,600)
Taxable Income 2020		$93,700
Enacted Tax Rate		30 %
Income Taxes Payable for 2020		$28,110

 

Requirement 2:

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

Sl.No	Account Title and Explanation	Debit	Credit
1	Income Tax Expenses	$83,490
	Income Tax Payable		$28,110
	Deferred Tax Liability		$55,380

Working:

 

	2021	2022	2023	Total
Future Taxable (deductible)Amount	$56,400	$61,800	$66,400	$184,600
Tax Rate	30%	30%	30%
Deferred Tax Liability (Asset)	$16,920	$18,540	$19,920	$55,380

 

Deferred Tax Liability at the end of 2020	$55,380
Deferred Tax Liability at the beginning of the year	0
Deferred Tax Expense for 2020 (Increase in deferred tax liability )	$55,380
Current Tax Expenses for 2020	$28,110
Income Tax Expense for 2020 [ 55,380 +28,110 ]	$83,490

 

Requirement 3:

 

Sarasota Corporation income statement (partial)
Particulars	Amount	Amount
Income Before Income Tax		$278,300
Less: Income Tax Expenses
Current  tax	($28,110)
Deferred tax	($55,380)	($83,490)
Net Income		$194,810

 

Taxable Income and Income Tax Payable for2020

Taxable Income	$93,700
Income Tax Payable	$28,110