Question

The following facts relate to Kingbird Corporation.

1. Deferred tax liability, January 1, 2017, $66,600.

2. Deferred tax asset, January 1, 2017, $22,200.

3. Taxable income for 2017, $116,550.

4. Cumulative temporary difference at December 31, 2017, giving rise to future taxable amounts, $255,300.

5. Cumulative temporary difference at December 31, 2017, giving rise to future deductible amounts, $105,450.

6. Tax rate for all years, 40%. No permanent differences exist.

7. The company is expected to operate profitably in the future.

Compute the amount of pretax financial income for 2017. Pretax financial income

Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2017. (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 2017, beginning with the line “Income before income taxes.” (Enter loss using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Compute the effective tax rate for 2017. (Round answer to 0 decimal places, e.g. 25%) The effective tax rate

Answer 1

Solution:

Computation of Temporary differences in 2017 and Pre tax financial Income
Particulars	Amount
Cumulatve Temporary diference at 31-dec-17 which give rise to Future Taxable amount	$255,300.00
Cumulatve Temporary diference at 01-Dec-17 which give rise to Future Taxable amount (66600/40%)	$166,500.00
Temporary difference for 2017 which give rise to future taxable amount	$88,800.00
Cumulatve Temporary diference at 31-dec-17 which give rise to Future Deductible amount	$105,450.00
Cumulatve Temporary diference at 01-Dec-17 which give rise to Future deductible amount (22200/40%)	$55,500.00
Temporary difference for 2017 which give rise to future Deductible amount	$49,950.00
Temporary difference for 2017 which give rise to future taxable amount (A)	$88,800.00
Temporary difference for 2017 which give rise to future Deductible amount (B)	$49,950.00
Taxable income for 2017 ( C )	$116,550.00
Pre Tax Financial Income (A+C-B)	$155,400.00

Journal Entry - Income Tax Expense
Particulars	Debit	Credit
Income Tax Expense A/c Dr	$62,160.00
Deferred Tax Asset Dr (49950*40%)	$19,980.00
To Deferred Tax Liabilities (88800*40%)		$35,520.00
To Income Tax Payable (116550*40%)		$46,620.00
(Being income tax expense recorded)

Extract - Income Statement
Particulars	Details	Amount
Pre Tax Financial Income		$155,400.00
Income Tax Expense - Current	$46,620.00
Income Tax Expense - Deferred	$15,540.00	$62,160.00
Net Income / (Loss)		$93,240.00

Effective tax rate for 2017 = $46,620 / $155,400 = 30%