Acme Industrial Products, uses straight-line depreciation for financial accounti

Question

Acme Industrial Products, uses straight-line depreciation for financial accounting purposes and MACRS for income tax purposes. Three years after its purchase. Acme's building has a book value of $800,000 and an income tax basis of $600,000. There are no other temprorary differences and no permanent differences. Acme's taxable income is $8,000,000 and its tax rate is 40%.

a) What's the deferred tax liability to be reported in the balance sheet?

b)Assuming that the balance in the deferred tax liability account at the end of last year was $64,000, prepare the journal entry to record this year's income taxes.

Explanation / Answer

a 800,000-600,000 = 200,000; 200,000*0.40 = 80,000
Answer: 80,000.
b. Debit: Income tax expense 3,200,000 (this is 8 million times 40%)
Credt: Income tax payable 3,184,000
Credit: Deferred income tax liability 16,000 (this is 80,000 - 64,000)

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