Asked by Nicole Jamison on Apr 29, 2024
Verified
Sherman Company uses an accelerated depreciation method for income tax purposes and the straight-line depreciation method for financial reporting purposes.As of December 31, 2010, Sherman has a deferred tax liability balance related to depreciation temporary differences of $80, 000.In 2011, depreciation for income tax purposes was $260, 000, while depreciation for financial reporting purposes was $200, 000.If the income tax rate is 30%, no other temporary or permanent differences exist, and taxable income is $300, 000, the entry to record income tax expense on December 31, 2011, would include a
A) debit to Income Tax Expense for $108, 000
B) credit to Income Taxes Payable for $108, 000
C) debit to Deferred Tax Asset for $24, 000
D) credit to Deferred Tax Liability for $24, 000
Deferred Tax Liability
A tax obligation that a company owes in the future due to timing differences between its taxable income and its accounting income.
Accelerated Depreciation
A method of depreciation that allows a business to write off the cost of an asset more quickly in the early years of its useful life.
Taxable Income
The amount of income used to determine an individual or corporation's income tax liability, after deductions and exemptions.
- Ascertain the cost related to income taxation, considering the implications of current and deferred tax liabilities.
- Comprehend the types of transactions usually associated with the generation of deferred tax assets and liabilities.
Verified Answer
Deferred tax liability balance (end of 2010) = $80,000
Depreciation temporary difference for 2011 = $260,000 – $200,000 = $60,000
Deferred tax liability balance (end of 2011) = $80,000 + $60,000 = $140,000
The income tax expense for 2011 can be calculated as follows:
Taxable income = $300,000
Income tax rate = 30%
Income tax expense = $300,000 x 30% = $90,000
The change in the deferred tax liability balance during the year (i.e., $140,000 – $80,000) is $60,000, which represents the tax effect of the depreciation temporary difference for the year. Therefore, the entry to record income tax expense on December 31, 2011, would include a debit to Income Tax Expense for $90,000 and a credit to Income Taxes Payable for $90,000.
Learning Objectives
- Ascertain the cost related to income taxation, considering the implications of current and deferred tax liabilities.
- Comprehend the types of transactions usually associated with the generation of deferred tax assets and liabilities.
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