Question

Mitchell Corporation prepared the following reconciliation for its first year of operations:

Pretax financial income for 2018: $1,800,000
Tax exempt interest (150,000)
Originating temporary difference (350,000)
Taxable income $1,300,000

The temporary difference will reverse evenly over the next two years at an enacted tax rate of 40%. The enacted tax rate for 2018 is 35%. What amount should be reported in its 2018 income statement as the deferred portion of income tax expense?

Answer 1

$140,000

Step-by-step explanation:

The amount that should be reported in Mitchell Corporation income statement in 2018 as deferred portion of income tax expense is the originating temporary difference of $350,000 multiplied by the rate of tax by which the temporary difference will reverse itself,which is 40% tax rate not the applicable tax rate in 2015 of 35%.

In other words,the deferred portion of income tax expense is $140,000($350,000*40%).

The appropriate entries would to debit income tax expense and credit deferred tax liability with $140,000