E19.10 (LO 1,2) (Two Temporary Differences, One Rate, Beginning Deferred Taxes,

Question

E19.10 (LO 1,2) (Two Temporary Differences, One Rate, Beginning Deferred Taxes, Compute Pretax Financial Income) The following facts relate to Duncan Corporation. 1. Deferred tax liability, January 1,2020, $30,000. 2. Deferred tax asset, January 1, 2020, $10,000. 3. Taxable income for 2020, $105,000. 4. Cumulative temporary difference at December 31, 2020, giving rise to future taxable amounts, $230,000 5. Cumulative temporary difference at December 31, 2020, giving rise to future deductible amounts, $95,000. 6. Tax rate for all years, 20%. No permanent differences exist. 7. The company is expected to operate profitably in the future.

Explanation / Answer

a) Computation of Pretax Financial Income

b) Journal Entry

Workings:

c)

d)

Effective TAx Rate = Total Tax Expenses / Pre tax Income

Effective TAx Rate = 48,000/240000

Effective TAx Rate = 20%

Please note if we want to calculate Current effective Tax Rate then,

Current effective Tax Rate = Current Tax/ Pre-tax Income

Current effective Tax Rate = 21000/240000

Current effective Tax Rate = 8.75%

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Taxable Income for 2020 $     105,000 Add: Future Taxable Amounts $     230,000 Less: Future Taxable Amounts $        95,000 Pretax Financial Income $     240,000

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