Question

Whispering Inc. had pretax financial income of $166,600 in 2020. Included in the computation of that amount is insurance expense of $3,700 which is not deductible for tax purposes. In addition, depreciation for tax purposes exceeds accounting depreciation by $9,600. Prepare Whispering’s journal entry to record 2020 taxes, assuming a tax rate of 25%.

Answer 1

The Journal Entry with narrations is shown below:-

Step-by-step explanation:

The Journal entry is shown below:-

1. Income tax expenses Dr, $42,575

To Income tax payable $40,175

To Deferred tax liability $2,400

(Being income tax expenses for the year is recorded)

Working note 1

Pretax financial income $166,600

Add: Permanent differences

Disallowed insurance expense $3,700

Less: Timing difference

Excess depreciation allowed $9,600

Income as per tax purpose $160,700

Working note 2

Income tax payable = Income tax rate × Income as per tax purposes

= 25% × $160,700

= $40,175

Working note 3

Deferred tax liability = Timing difference × Tax rate

= $9,600 × 25%

= $2,400