Question

In: Accounting

Illusions Inc. just completed its second year of operations and has a deferred tax asset of?...

Illusions Inc. just completed its second year of operations and has a deferred tax asset of? $47,500 related to a net operating loss of? $125,000 from the previous year. In the current year Illusions generates? $400,000 in revenues and incurs? $250,000 in expenses. There are no permanent or temporary? book-tax differences. Assuming the same tax rate as last? year, what amount will Illusions record for Income Tax Payable in the current? year?

Solutions

Expert Solution

  • All working forms part of the answer
  • Calculation of Tax rate

A

Deferred Tax Assets

$                47,500.00

B

Net Operating Loss

$              125,000.00

C= A/B

Tax Rate

38%

  • Calculation of current year taxable income and income tax payable thereon

A

Current Revenues

$              400,000.00

B

Expenses

$              250,000.00

C= A - B

Net Income

$              150,000.00

D

Loss set off

$           (125,000.00)

E = C + D

Taxable Income

$               25,000.00

F

Tax Rate

38%

G = E x F

Income Tax Payable

$                  9,500.00

  • Income Tax payable will be $ 9,500. Deferred Tax Assets of $ 47500 will be reversed as the benefits have been relaized when losses were setoff against current year net income.
  • The journal Entry would be:

Accounts title

Debit

Credit

Income Tax Expense

$                57,000.00

Deferred Tax Assets

$        47,500.00

Income Taxes Payable

$          9,500.00


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