Question

Swifty Corp. has a deferred tax asset account with a balance of $152,800 at the end of 2016 due to a single cumulative temporary difference of $382,000. At the end of 2017, this same temporary difference has increased to a cumulative amount of $455,000. Taxable income for 2017 is $816,000. The tax rate is 40% for all years. No valuation account related to the deferred tax asset is in existence at the end of 2016.

Record income ta Deferred Tax Asset d income taxes, and income taxes payable for 2017, assuming that it is more likely than not that the deferred tax asset will be realized

Account Titles and Explanation Debit Credit
Income Tax Expense
Deferred Tax Asset
Income Tax Payable

Answer 1

To record income tax expense, deferred tax asset, and income taxes payable for 2017, we need to consider the change in cumulative temporary difference. The income tax expense is calculated using the taxable income and tax rate. The deferred tax asset is increased by the change in cumulative temporary difference. The income taxes payable is the difference between income tax expense and change in deferred tax asset.

Step-by-step explanation:

At the end of 2016, Swifty Corp. has a deferred tax asset with a balance of $152,800. This is due to a single cumulative temporary difference of $382,000. The cumulative temporary difference has increased to $455,000 at the end of 2017. Since it is more likely than not that the deferred tax asset will be realized, we need to record income tax expense, deferred tax asset, and income taxes payable for 2017.

Using the tax rate of 40%, the income tax expense will be calculated as follows:

Income Tax Expense = Taxable Income * Tax Rate = $816,000 * 0.40 = $326,400

The deferred tax asset will be increased by the change in cumulative temporary difference:

Deferred Tax Asset = Previous Balance + Change in Cumulative Temporary Difference = $152,800 + ($455,000 - $382,000) = $225,800

The income taxes payable will be the difference between the income tax expense and the change in deferred tax asset:

Income Taxes Payable = Income Tax Expense - Change in Deferred Tax Asset = $326,400 - ($225,800 - $152,800) = $253,400