Question

Two independent situations are described below. Each situation has future deductible amounts and/or future taxable amounts produced by temporary differences:

Situation1 2Taxable income$40,000 $80,000Amounts at year-end: Future deductible amounts5,000 10,000Future taxable amounts0 5,000Balances at beginning of year: Deferred tax asset$1,000 $4,000Deferred tax liability0 1,000
The enacted tax rate is 40% for both situations.
Determine the income tax expense for the year.

Answer 1

The income tax expense for Situation 1 is $17,000 and for Situation 2 is $31,000, calculated by considering the future deductible and taxable amounts, deferred tax assets, and liabilities and applying the enacted tax rate of 40% for both situations.

Step-by-step explanation:

To determine the income tax expense for the two situations provided, we need to consider the future deductible and taxable amounts, along with the changes in the deferred tax asset and liability and apply the enacted tax rate of 40%.

Situation 1

Starting with taxable income of $40,000, the future deductible amount at year-end is $5,000, producing a deferred tax asset of $2,000 (40% of $5,000). Since there is no future taxable amount, there is no need to calculate a deferred tax liability. Therefore, the net change in the deferred tax asset is an increase of $2,000 - $1,000 (beginning balance) = $1,000. The total income tax expense for the year is the taxable income multiplied by the tax rate plus the change in the deferred tax asset: ($40,000 * 40%) + $1,000 = $17,000.

Situation 2

For $80,000 of taxable income, the future deductible amount is $10,000, leading to a deferred tax asset of $4,000. The future taxable amount is $5,000, resulting in a deferred tax liability of $2,000. The net change in the deferred tax asset is $4,000 - $4,000 (beginning balance) = $0, and the change in the deferred tax liability is $2,000 - $1,000 (beginning balance) = $1,000. The income tax expense is ($80,000 * 40%) + $0 (DTA change) - $1,000 (DTL change) = $31,000.