Question

E19.22 (LO1,4) (Two Differences, One Rate, First Year) The differences between the book basis and tax basis of the assets and liabilities of Morgan Corporation at the end of 2019 are presented below.

	Book Basis	Tax Basis
Accounts receivable	$50,000	$–0–
Litigation liability	20,000	–0–

It is estimated that the litigation liability will be settled in 2020. The difference in accounts receivable will result in taxable amounts of $30,000 in 2020 and $20,000 in 2021. The company has taxable income of $300,000 in 2019 and is expected to have taxable income in each of the following 2 years. Its enacted tax rate is 34% for all years. This is the company's first year of operations.

Instructions

a. Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2019.

b. Indicate how deferred income taxes will be reported on the statement of financial position at the end of 2019.

Answer 1

Q1
Sr.No.	Particulars	Financial Year
		2019	2020	2021	Total
1)	Taxable Income	300,000.00	-	-
2)	Tax Rate	34.00%
3)	Tax Amount (1*2)	102,000.00
	Calculation of Deferred Tax
	Liability
	- Accounts Receivable		30,000.00	20,000.00	50,000.00
	Asset
	- Litigation Liability		20,000.00		20,000.00
	Net		10,000.00	20,000.00	30,000.00
	Tax Rate				34%
	Deffered Tax Liability (Net)				10,200.00
	Recognition of tax expense: Tax Expenses = Current Tax +/- Deferred Tax a) if it is deferred tax liability it needs to be added to deferred tax expenses and shown as deferred tax payable. b) if it is deferred tax asset it needs to be deducted from tax expense and shown as deferred tax receivable. In the above situation, it is a deferred tax liability, so it needs to be added to the tax expenses and shown as liability under current liabilities.
	Tax Expenses = 102000 + 10200 = 112200
	Journal Entry:
	Account Titles	Debit	Credit
	Tax Expenses A/c	112,200.00
	Tax Payable		102,000.00
	Deferred Tax Liability		10,200.00
Q2	Deferred Tax Liability would be indicated in the financial statement as-
	Extract of the statement of financial position:
	Particulars	Note No.	2019	2018
	Liabilities and Equity
	Current Liabilities
	Deferred Tax Liability	----------	10,200.00	-