Question

Vaughn Company reports pretax financial income of $66,100 for 2020. The following items cause taxable income to be different than pretax financial income.
1. Depreciation on the tax return is greater than depreciation on the income statement by $14,800.
2. Rent collected on the tax return is greater than rent recognized on the income statement by $23,900.
3. Fines for pollution appear as an expense of $10,600 on the income statement.
Vaughn’s tax rate is 30% for all years, and the company expects to report taxable income in all future years. There are no deferred taxes at the beginning of 2014.
Required:
(a) Compute taxable income and income taxes payable for 2020.
(b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2020.

Answer 1

Answer:

A1. Taxable income is $85,800

A2. Income tax payable is $19,830

B.

B.

Income tax expense will be the tax rate applied to the Tax Payable amount of $85,800 = $25,740

Whereas the Tax Payable was worked out in the part 1 of our solution as $19,830. This leaves us with an under provision of taxes of $5,910. This $5,910 under provision is referred to as the Deferred tax provision.

Journal Entries

Income tax expense

Debit Income tax payable account with $19,830

Debit Deferred income tax liability Account with $5,910

Credit Cash with $25,740

(Being payment of 2020 Income tax expense to the IRS)

Deferred income tax

Debit Deferred Income tax Account with $5,910

Credit Deferred income tax Liability Account with $5,910

(Being deferred income tax liability for 2020)

Income tax payable

Debit income tax Account with $19,830

Credit Income tax Payable Account with $19,830

(Being Income tax payable on

income from 2020)

Explanation:

Vaughn company

Taxable income is income reviewed from the eyes of the tax authority.

There are some elements of the income statement that are allowable and some not allowable for tax deductions subject to the IRS rules. These are to be considered in finalising the Business Taxable income

Pretax income from financial statement for 2020 = $66,100

Deduct Tax adjustments on Asset Written down Value = -$14,800

Add back Rent received in advance = $23,900

Add back fines on pollution = $10,600

TAXABLE INCOME = $85,800

Income tax Payable on the other hand is a provision made for tax liability based on income arising from the Financial statement. It is an Accounting provision not calculated by the Tax authorities.

In this case, Gross Income was declared to be $66,100

Applying 30% on that gives us our income Tax payable = $19,830

B.

Income tax expense will be the tax rate applied to the Tax Payable amount of $85,800 = $25,740

Whereas the Tax Payable was worked out in the part 1 of our solution as $19,830. This leaves us with an under provision of taxes of $5,910. This $5,910 under provision is referred to as the Deferred tax provision.

Journal Entries

Income tax expense

Debit Income tax payable account with $19,830

Debit Deferred income tax liability Account with $5,910

Credit Cash with $25,740

(Being payment of 2020 Income tax expense to the IRS)

Deferred income tax

Debit Deferred Income tax Account with $5,910

Credit Deferred income tax Liability Account with $5,910

(Being deferred income tax liability for 2020)

Income tax payable

Debit income tax Account with $19,830

Credit Income tax Payable Account with $19,830

(Being Income tax payable on

income from 2020)

Answer 2

Answer:

a) Taxable Income = $65,200

Income Taxes Payable = $19,560

b) Debit Income tax Expense $19,560 Credit Income Tax payable $19,560

Debit Income Tax Expense $11,610 Credit Deferred Tax $11,610

Debit Profit and loss Account $31,170 Credit Income Tax Expense $31,170

Explanation:

PreTax Income                          $66,100

1 . Depreciation                          -$14,800

2 . Rent                                     +$23,900

3 . Fines                                   -$10,000

Taxable Income                     $65,200

Income Tax Payable (30%)   $19,560

Taxable income is in few words net income computed by The Taxman using tax laws and methods. in some cases the Accountant and Taxman can disagree on some things therefore creating temporal and permanent difference. Hence we adjust the Pretax income to arrive at Taxable income.

Income Tax Expense = Income Tax Payable + Deferred tax

Deferred tax arises from temporal difference (Carrying amount - Tax Base)

Deferred Tax = (14,800 * 30%) + ($23,900*30%)

                     = $4,440 + $7,170

                    = $11,610

Fines are permanent difference therefore no differed tax arises from them.