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Q19E.

Expert-verified
Intermediate Accounting (Kieso)
Found in: Page 1099

Short Answer

Nadal Inc. has two temporary differences at the end of 2016. The first difference stems from installment sales, and the second one results from the accrual of a loss contingency. Nadal’s accounting department has developed a schedule of future taxable and deductible amounts related to these temporary differences as follows. 2017 2018 2019 2020 Taxable amounts $40,000 $50,000 $60,000 $80,000 Deductible amounts (15,000) (19,000) $40,000 $35,000 $41,000 $80,000 As of the beginning of 2016, the enacted tax rate is 34% for 2016 and 2017, and 38% for 2018–2021. At the beginning of 2016, the company had no deferred income taxes on its balance sheet. Taxable income for 2016 is $500,000. Taxable income is expected in all future years. Instructions (a) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2016. (b) Indicate how deferred income taxes would be classified on the balance sheet at the end of 2016.

The deferred amounts of the income tax are calculated by using the future taxable amounts and their respective tax rate. This calculation gives the organization the amount for its deferred asset/liability.

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Step by Step Solution

Working notes for the calculation of deferred tax asset/liability for the year 2016

Temporary difference

Taxable amounts

Tax rate

Deferred tax asset

Deferred tax liability

Installment sale

$40,000

34%

$13,600

Installment sale

$190,000

38%

$72,200

Loss accruals

($34,000)

38%

($12,920)

Total

$196,000

($12,920)

$85,800

(a) Recording of the journal entry for the year 2016

Date

Particulars

Debit

Credit

2016

Income tax expense

$242,880

Deferred tax asset

$12,920

Income tax payable

$170,000

Deferred tax liability

$85,800

(To record the income tax expense)

(b) Indication of the amounts in the balance sheet

Balance sheet

Liabilities

Amount

Current liabilities

Deferred tax liability

$85,800

Assets

Amount

Other assets

Non-current assets

Deferred tax asset

$12,920

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