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Q11E.

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Intermediate Accounting (Kieso)
Found in: Page 1097

Short Answer

At the end of 2016, Lucretia McEvil Company has $180,000 of cumulative temporary differences that will result in reporting the following future taxable amounts. 2017 $ 60,000 2018 50,000 2019 40,000 2020 30,000 $180,000Tax rates enacted as of the beginning of 2015 are: 2015 and 2016 40% 2017 and 2018 30% 2019 and later 25% McEvil’s taxable income for 2016 is $320,000. Taxable income is expected in all future years. Instructions (a) Prepare the journal entry for McEvil to record income taxes payable, deferred income taxes, and income tax expense for 2016, assuming that there were no deferred taxes at the end of 2015. (b) Prepare the journal entry for McEvil to record income taxes payable, deferred income taxes, and income tax expense for 2016, assuming that there was a balance of $22,000 in a Deferred Tax Liability account at the end of 2015.

A deferred income tax represents the amount that arises due to the difference between the income tax expense due to the organization's accounting techniques and the income tax laws.

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Step by Step Solution

Computation of deferred tax liability

Year

Taxable amounts

Tax Rate

Deferred tax liability

2017

$60,000

30%

$18,000

2018

$50,000

30%

$15,000

2019

$40,000

25%

$10,000

2020

$30,000

25%

$7,500

Total

$180,000

$50,500

(a) Journal entry

Date

Particulars

Debit

Credit

2016

Income tax expense

$178,500

Income tax payable

$128,000

Deferred tax liability

$50,500

(To record the income tax expense)

(b) Journal entry

Date

Particulars

Debit

Credit

2015

Income tax expense

$156,500

Income tax payable

$128,000

Deferred tax liability

$28,500

(To record the income tax expense)

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