Question

Ayayai Inc. has two temporary differences at the end of 2016. The first difference stems from installment sales, and the second one results from the accrual of a loss contingency. Ayayai’s accounting department has developed a schedule of future taxable and deductible amounts related to these temporary differences as follows.

	2017	2018	2019	2020
Taxable Amounts	36,500	52,200	63,200	73,600
Deductible Amounts		(15,500)	(19,900)
	36,500	36,700	43,300	73,600

As of the beginning of 2016, the enacted tax rate is 34% for 2016 and 2017, and 38% for 2018–2021.

At the beginning of 2016, the company had no deferred income taxes on its balance sheet. Taxable income for 2016 is $452,000. Taxable income is expected in all future years.

Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2016.

Indicate how deferred income taxes would be classified on the balance sheet at the end of 2016.

Answer 1

Journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2016.

Income Tax Expense A/c                            Dr     $ 242538

Deferred Tax Asset A/c                     Dr     $ 13452

     To Tax Payable       A/c Cr                                  $171760

     ($ 452000*38%)

     To Deferred Tax Liability A/c Cr                                  $ 84230

Future taxable      Tax Rate            Deferred Tax (Deductible)                             (Asset)       Liability

Temporary difference

Installment Sale $ 36500               34%                               $ 12410

Installment Sale $ 189000             38% $ 71820

(52200+63200+73600)  

Loss Accrual $ (35400)             38%           $ (13452)

(15500+19900)

Total $ 196,000                              $ (13452) $ 84230

Ayayai Inc

Balance Sheet 31-Dec-16

Other Assets (non Current)

Deferred Tax asset                 $ 13452

Current Liabilities

Deferred Tax Liability             $ 84230