Question

4. Based on a number of contracts in 2017 and 2018, Brangus recognized $18,000 and $20,000 of book income in 2017 and 2018 for book purposes and $12,000 and $22.000 on those same contracts in 2017 and 2018 for tax purposes. If the net income before tax in 2018 was $50,000 and the tax rate is 36% in 2017, 34% in 2018 and 32% in 2019, prepare the journal entry for income taxes for 2018.

Answer 1

Particulars    As per Books Tax purpose Tax Rate Difference

2017 $18,000 $12,000 36% $6,000

2018 $20,000 $22,000 34% $2,000

2019 0 0 32% 0

Deffered Tax Assest Means Advance Tax paid or excess tax paid by the company

Deffered Tax Liability means lesser tax paid by the company

Deffered tax arises when expenses claimed by the company is lower than the expenses allowed by the tax department resulting into showing excess income by the company it leads to more payment of tax, Deffered tax liability is opposite to the differed tax assest

During the Year 2017 Company showing excess income by $6,000 resulting into excess payment of tax of $6000*34%=$2040

Journal entry during the year 2017

Deffered tax assest A/c Dr $2040

Profit or loss A/c $2040

During the Year 2018 Company showing lesser income by $2,000 resulting into lesser payment of tax of $2000*32%=$640

Journal entry during the year 2017

Profit or loss A/c $640

  Deffered tax Liability A/c $640

Adjustment entry

Deffered Tax liability a/c Dr $640

   Deffered tax assest A/c $640

Deffered tax assest /liability is computed taking the future tax rate applicable for the company

For the year 2017 34%

For the year 2018 32%