Question

Which of the options below would cause the following journal entry to be made?

Debit income tax expense 500k
Credit taxes payable 525k
Debit deferred income tax liability 25k

Answer 1

The journal entry Debit income tax expense and Credit taxes payable is made to record an increase in taxable income and the corresponding income tax liability. This occurs when a company owes more income taxes due to an increase in taxable income.

Step-by-step explanation:

The journal entry mentioned, Debit income tax expense and Credit taxes payable, indicates that a company has recognized an expense for income taxes due for the period. This journal entry is typically made at the end of the accounting period to record the estimated income tax liability.

The option that would cause this journal entry to be made is an increase in taxable income. When a company's taxable income increases, it will owe more income taxes to the government. This increase in income tax expense is recorded as a debit to income tax expense and a credit to taxes payable.

For example, if a company's taxable income increases by $500k, the income tax expense will also increase by the same amount, resulting in a debit of $500k to income tax expense. To balance the journal entry, taxes payable will be credited with the amount owed, which in this case is $525k. The difference between the income tax expense and taxes payable, which is $25k in this case, will be recorded as a debit to deferred income tax liability.