Final answer:
To record income taxes with a pretax accounting income of $10 million, taxable income of $12 million, and a tax rate of 40%, a company must debit Income Tax Expense for $4 million, credit Income Taxes Payable for $4.8 million, and debit Deferred Tax Liability for $800,000.
Step-by-step explanation:
When a company reports pretax accounting income of $10 million and a taxable income of $12 million due to a single temporary difference with a tax rate of 40%, the journal entries to record income taxes will reflect deferred tax liability. The company would first calculate the income tax expense on the accounting income, which would be $10 million multiplied by 40%, resulting in $4 million. This amount represents the income tax expense reported on the income statement.
The company would also recognize a deferred tax liability for the difference in accounting and taxable income, which is $2 million ($12 million taxable income minus $10 million pretax accounting income). The deferred tax liability would be the $2 million difference multiplied by the 40% tax rate, resulting in $800,000. This recognizes that the company will owe additional taxes in the future when the temporary difference reverses.
Therefore, the journal entry would be:
- Debit Income Tax Expense for $4 million
- Credit Income Taxes Payable for $4.8 million
- Debit Deferred Tax Liability for $800,000