Question

In year 1, Casa Corp. has depreciation expense for income statement purposes of $20,000. The depreciation deduction on the tax return was $30,000. The enacted tax rate is 40%. Casa's pretax income for the year was $100,000, and its taxable income was $90,000. If this is the only difference between pretax income and taxable income, the journal entry to record tax expense for the year would include which of the following entries? (Select all that apply.)

Multiple select question.

debit tax expense of $40,000


credit deferred tax liability of $4,000


debit deferred tax asset of $10,000


credit deferred tax liability of $36,000


credit taxes payable of $36,000

Answer 1

The journal entry to record Casa Corp.'s tax expense includes a debit to tax expense of $40,000, a credit to deferred tax liability of $4,000, and a credit to taxes payable of $36,000.

Step-by-step explanation:

To determine the journal entry to record tax expense for Casa Corp., we need to calculate the difference between the book depreciation and tax depreciation and apply the tax rate to that difference. Since the depreciation expense for income statement purposes is $20,000 and the depreciation deduction on the tax return is $30,000, Casa Corp. has a temporary difference of $10,000 ($30,000 - $20,000).

This creates a deferred tax liability because the company will have to pay more taxes in the future when this difference reverses. The tax effect of this temporary difference is calculated at the enacted tax rate of 40%, which amounts to $4,000 (40% of $10,000). Additionally, Casa's taxable income is $90,000, so the actual taxes payable would be $36,000 (40% of $90,000).

Therefore, the correct journal entries to record Casa's tax expense would include:

• Debit tax expense of $40,000
• Credit deferred tax liability of $4,000
• Credit taxes payable of $36,000