Question

For the current year temporary differences existed between the financial statement carrying amounts and the tax basis of the following:

Carrying Amount Tax Basis Future Taxable or (Deductible) Amount
Buildings and equipment $57,000,000 $42,300,000 $14,700,000
Prepaid insurance 2,300,000 0 2,300,000
Liability-loss contingency 11,300,000 0 (11,300,000 )

No temporary differences existed at the beginning of the year. Pretax accounting income was $270,000,000 and taxable income was $117,000,000 for the year and the tax rate is 40%. Permanent differences are the cause of any difference between pretax accounting income and taxable income that are not due to temporary differences.

Required:
Prepare one journal entry to record the tax provision for the current year.

Answer 1

Income Tax Expense (Dr.) $49,080,000

Deferred Tax Liability (Cr.) $49,080,000

Step-by-step explanation:

Income tax expense = ( Taxable Income for the year + building and equipment taxable amount + Prepaid Insurance - Liability or contingency Loss ) * Tax rate

Income Tax expense = ( $117,000,000 + $14,700,000 + $2,300,000 - $11,300,000) * 40%

Income Tax expense = $49,080,000