Question

Brief Exercise 19-3

Oxford Corp. began operations in 2017. Reported pretax financial income of $225,000 for the year. Tax depreciation exceeded book depreciation by $40,000. 2017 tax rate 30% and years thereafter. Assume this is Oxford's only difference between Oxford's pretax financial income and taxable income. Prepare journal entries to record the income tax expense, deferred income tax and income tax payable.

Also, show how the deferred tax liability should be classified on December 31, 2017 balance sheet.

Answer 1

• Excess of tax depreciation over book depreciation will result in lower income for income tax purposes for current year. This will be resulting in a temporary difference which will reverse in coming future.
• Since today or at present the company will have to pay lower taxes [due to excess depreciation], this difference will result in creation of Deferred Tax Liabilities.
• Calculation of Deferred tax Liabilities

Temporary depreciation difference = $40000
Tax Rate 30%

Deferred Tax Expense = $40,000 x 30% = $12,000

• Taxable income will be $225,000 - $40,000 = $185,000
• Current Income Tax payable = $185,000 x 30% = $55,500
• Journal Entry

General Journal	Debit	Credit
Income Tax Expenses	$          67,500.00
Income Tax Payable		$      55,500.00
Deferred Tax Liabilities		$     12,000.00

• In Balance Sheet

LIABILITIES & STOCKHOLDERS' EQUITY
Liabilities:
Deferred Tax Liabilities	$12,000