Question

A company reports 2021 pretax accounting income of $66 million, but because of a single temporary difference, taxable income is only $35 million. No temporary differences existed at the beginning of the year, and the tax rate is 25%. Prepare the appropriate journal entry to record income taxes.

Answer 1

To record the income taxes, a journal entry must reflect the tax expense on the accounting income, the actual tax payable, and the creation of a deferred tax asset due to the difference between accounting income and taxable income, with the tax rate being 25%.

Step-by-step explanation:

The question asks how to record income taxes in a journal entry when there is a temporary difference between pretax accounting income and taxable income. Given that 2021 pretax accounting income is $66 million and taxable income is $35 million, we have a temporary difference of $31 million. With a tax rate of 25%, the calculated tax expense on the accounting income would be $66 million * 25% = $16.5 million. However, the actual tax payable according to the taxable income would be $35 million * 25% = $8.75 million.

JOURNAL ENTRY:

Income Tax Expense (Dr.) $16.5 million

Deferred Tax Asset (Dr.) $5.75 million

Income Tax Payable (Cr.) $8.75 million

This entry recognizes both the current tax payable based on taxable income and the deferred tax asset which will be realized in the future when the temporary difference reverses.

Answer 2

Income tax expense $1,000,000 Dr.

Deferred tax liability $7,750,000 Dr.

To income tax payable $8,750,000 Cr.

Step-by-step explanation:

Given the following :

Pretax accounting income = $66 mollion

TAXABLE INCOME = $35 million

Tax rate = 25%

Income tax payable:

Income tax rate × taxable income

25% × 35,000,000

= $8,750,000

Deferred tax liability :

(pretax income - taxable income) × tax rate

($66 - $35) million × 25%

$31,000,000 × 25%

= $7,750,000

Income tax expense :

Deferred tax + income tax payable

$(8,750,000 - 7,750,000)

= $1,000,000