Question

Two independent situations are described below. Each involves future deductible amounts and/or future taxable amounts produced by temporary differences:
SITUATION 1 2
Taxable income $120,000 $30,000
Amounts at year-end:
Future deductible amounts 18,000 12,000
Future taxable amounts 0 8,000
Balances at beginning of year,
Deferred tax asset $2,000 $4,000
Deferred tax liability 0 1,000
The enacted tax rate is 25% for both situations.
Required: (show the computing process and precise journal entries)
A. For each situation determine the:
(a) Income tax payable currently.
(b) Deferred tax asset - balance at year-end.
(c) Deferred tax asset change for the year.
(d) Deferred tax liability - balance at year-end.
(e) Deferred tax liability change for the year.
(f) Income tax expense for the year.
B. PREPARE THE APPROPRIATE JOURNAL ENTRIES. (show the computing process and precise journal entries)

Answer 1

Temporary differences arise when there is a difference between the tax base and the carrying amount of assets and liabilities. Permanent differences are differences between the tax and financial reporting of revenue or expense items which will not be reversed in future.

What do you mean by temporary differences?

Temporary differences are defined as being differences between the carrying amount of an asset or liability in the statement of financial position and its tax base (ie the amount attributed to that asset or liability for tax purposes).

What causes a temporary difference?

Thus, when the tax bases are indexed for inflation, temporary differences arise as a result of the change in tax basis and those differences give rise to deferred taxes under ASC 740-10-25-20(g).

Learn more about temporary differences here:

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