Differences between the accounting methods applied to accounts and financial rep

Question

Differences between the accounting methods applied to accounts and financial reports and those used in determining taxable yielded the following amounts for the first four years of a corporations' operations:

Income before income taxes 250000 300000 500000 400000
Taxable Income 200000 280000 540000 430000

The income tax rate for each of the four years was 40% of taxable income, and each year's taxes were promptly paid.

how do you get the income tax payments for the year, the deferred income tax payable?

Explanation / Answer

In order to compute the income tax payments (income tax payable) you multiply taxable income by the tax rate for the corresponding year. In order to compute the deffered income tax payments resulting from temporary differences (deferred tax liability - results from taxable income being lower than financial income or a deferred tax asset,which results from taxable income being higher than financial income) calculate the difference between taxable income and financial income. If taxable income is less than financial income it is a deferred tax liability. If taxable income is higher than financial income the difference is a deferred tax asset. In order to compute the total deferred tax asset or liability for the year, multiply the difference by the tax rate of the year the asset or liability will be credited or paid respectively. To record a tax liability you would dr income tax expense, cr deferred tax liability, and cr income tax payable. To record a deferred tax asset you would dr income tax expense, dr, deferred tax asset, and cr income tax payable. Income tax expense is always a plug.

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