Question

Windsor company started 2016 with a deferred tax liability of $150. As of the end of the period, Windsor identifies future taxable amounts of $500. Windsor has a tax rate of 40%, and calculates that taxes payable will be $120. Windsor's tax expense journal entry will include a:

a. Debit to Tax Expense for $200
b. Debit to Tax Expense for $170.
c. Debit to Tax Expense for $50
d. Credit to Tax Expense for $30

Answer 1

The correct tax expense for Windsor company is $170, calculated by adding the tax payable amount of $120 with the increase in deferred tax liability, which is $50. The question's specified credit of $30 appears to be incorrect.

Step-by-step explanation:

The question pertains to the calculation of tax expense for the Windsor company. With a beginning deferred tax liability of $150 and future taxable amounts of $500, the company must adjust its tax accounts accordingly. Windsor's tax rate is 40%, and the anticipated taxes payable are $120. To compute the tax expense, the formula is:

Tax Expense = Tax Payable + Change in Deferred Tax Liability.

Since the future taxable amount is $500 and the tax rate is 40%, the future deferred tax liability is 40% of $500, which is $200. The change in the deferred tax liability is $200 (current) - $150 (beginning), which is an increase of $50. Therefore, the tax expense is the sum of taxes payable ($120) and the change in deferred tax liability ($50), resulting in a total tax expense of $170.

However, as the question states that the tax expense journal entry will include a credit for $30, which seems to be a misunderstanding because the tax expense in the scenario described is $170. Therefore, if considering only the tax payable of $120, the credit to the tax expense should be $120, not $30.