Question

In year 1, Heron Corp. has depreciation expense for income statement purposes of $10,000. The depreciation deduction on the tax return was $14,000. The enacted tax rate is 30%. Heron's pretax income for the year was $80,000, and its taxable income was $76,000. 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?

a. debit tax expense of $22,800.
b. credit deferred tax liability of $4,000.
c. debit tax expense of $24,000.
d. credit taxes payable of $22,800.
e. credit deferred tax liability of $1,200.

Answer 1

The correct options are as follows:

c. debit tax expense of $24,000.

d. credit taxes payable of $22,800.

e. credit deferred tax liability of $1,200.

Step-by-step explanation:

In the question, we are given the following:

Enacted tax rate = 30%

Pretax income for the year = $80,000

Taxable income = $76,000

The following can now be calculated:

Tax expense = Pretax income for the year * Enacted tax rate = $80,000 * 30% = $24,000

Tax payable = Taxable income * Enacted tax rate = $76,000 * 30% = $22,800

Excess of Tax expense over Tax payable = Tax expense - Tax payable = $24,000 - $22,800 = $1,200

The above will then be recorded as follows:

Debit tax expense of $24,000.

Credit taxes payable of $22,800.

Credit deferred tax liability of $1,200.

Therefore, the correct options are as follows:

c. debit tax expense of $24,000.

d. credit taxes payable of $22,800.

e. credit deferred tax liability of $1,200.