Question

Company A has pretax financial income of 520,000 at the end of 2021.

For tax purposes, depreciation was 1,200,000 higher than book (this will result in taxable amounts of $400K over the next three years)

Estimated deductible expenses for tax for 890,000 (this will be deductible in 2024)

The tax rate is 20% and will remain 20% over the next few years

Step 1: Reconcile Book income to Tax - What is tax books income?

Step 2: Create a schedule of future taxable and deductible amounts

Step 3: Calculate tax expense, what are the DTA's and the DTL (if it helps make the Journal Entry)

Answer 1

Solution:

Step 1: Reconcile Book income to Tax:

Taxable income = Pretax financial income - Excess of tax depreciation over books + Future deductible amount as per tax

= $520,000 - $1,200,00 + $890,000 = $210,000

Step 2: Create a schedule of future taxable and deductible amounts:

Future taxable amount = $1,200,000

Future deductible amount = $890,000

Step 3:Calculate tax expense, what are the DTA's and the DTL

Tax expense = $520,000*20% = $104,000

Deferred tax assets = $89,000 * 20% = $178,000

Deferred tax liability = $1,200,000*20% = $240,000

Journal Entries - Company A
Date	Particulars	Debit	Credit
31-Dec-21	Income tax expense Dr	$104,000.00
	Deferred tax assets Dr	$178,000.00
	To Income taxes payable		$42,000.00
	To Deferred tax liability		$240,000.00
	(To record income tax expense for the year)