Question

Company Y had book income of $600,000. The following items were identified:

1. Income from PA Municiple Bonds: 10,000

2. Excess Depreciation Expense: 60,000

3. Officers Life Insurance Expense: 5,000

4. Bad Debt Provision (Expense): 7,000 (no- charge offs this year)

5. Warranty Reserve (Expense): 12,000 (no claims this year)

6. Meals and Entertainment Expense: 20,000 (100% of expenses)

Company Y's tax rate is 40%

Beginning of the year, cumulative temporary difference is computed as follows:

Book Accumulated Depreciation: 110,000

Tax Accumulated Depreciation: 150,000

Cumulative Difference in PP&E: 40,000

Cumulative Difference in Accounts Receuvable Provision: 20,000

Cumulative Difference in Warranty Reseve: 80,000

Taxable Income: 674,000

Deferred Tax Asset: 31,600

Income Tax Payable: 269,600

Income Tax Expense: 238,000

1. Calculate Deferred expense/benefit

2. Prepare an adjusting journal entry to record the deferred tax provision

3. Calculate total provision (current plus deffered)

Answer 1

1. Deferred Tax Expense / Benefit Calculation:

It is presumed that in this part, the question is related to "Deferred Tax Expense" and not "Deferred Expense".

A deferred tax expense is a tax expense which has not yet been paid by the corporation and which has accrued due to difference in accounting principles defined by GAAP and Taxation Law. Similarliy a deferred tax benefit is a non-cash income to the corporation. Deferred Tax Expense is mostly related to difference in deprecation calculation methods.

Net Difference in Depreciation= Book Accumulated Depreciation- Tax Accumulated Depreciation= 110000-150000= (-)40000

Deferred Tax Liability (Since book dep. is less than tax dep.) = Company's Tax Rate * Difference in Depreciation = 40% * 40000= 16000

2. Journal Entry for Deferred Tax Liability Provision

Deferred Tax Expense A/c Dr. 16000

To Deferred Tax Liability A/c 16000

(Being DTL of 16000 accounted in books.)

3. Total Provision

Current Tax on Taxable Income = 674000*40%= 269600

Deferred Tax Liability = -(16000)

Net Tax Provision= 253600