E19-3 (One Temporary Difference, Future Taxable Amounts, One Rate, Beginning Def

Question

E19-3 (One Temporary Difference, Future Taxable Amounts, One Rate, Beginning Deferred Taxes) Bandung Corporation began 2014 with a $92,000 balance in the Deferred Tax Liability account. At the end of 2014, the related cumulative temporary difference amounts to $350,000 and it will reverse evenly over the next 2 years. Pretax accounting income for 2014 is $525,000 , the tax rate for all years is 40% , and taxable income for 2014 is $405,000 Instructions:

Note to instructor: Because of the flat tax rate for all years, the amount of cumulative temporary difference existing at the beginning of the year can be calculated by dividing $92,000 by 40%, which equals $230,000. The difference between the $230,000 cumulative temporary difference at the beginning of 2014 and the $350,000 cumulative temporary difference at the end of 2014 represents the net amount of temporary difference originating during 2014 (which is $120,000). With this information, we can reconcile pretax financial income with taxable income as follows:

(a) Compute income taxes payable for 2014. Taxable income for 2014 $405,000 Enacted tax rate 40% Income tax payable for 2014 $162,000 (b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes
     payable for 2014. Future Years 2015 2016 Total Future taxable (deductible) amounts Amount Amount Formula Tax Rate Percentage Percentage Deferred tax liability (asset) Formula Formula Formula Deferred tax liability at the end of 2014 Amount Title Amount Title Formula Title Formula Title Formula Account Title Amount Account Title Amount Account Title Amount (c) Prepare the income tax expense section of the income statement for 2014, beginning with the line
     "Income before income taxes." Income before income taxes $525,000 Income tax expense current $162,000 deferred 48,000 210,000 net income $315,000

Note to instructor: Because of the flat tax rate for all years, the amount of cumulative temporary difference existing at the beginning of the year can be calculated by dividing $92,000 by 40%, which equals $230,000. The difference between the $230,000 cumulative temporary difference at the beginning of 2014 and the $350,000 cumulative temporary difference at the end of 2014 represents the net amount of temporary difference originating during 2014 (which is $120,000). With this information, we can reconcile pretax financial income with taxable income as follows:

Pretax financial income Amount Title Amount Title Formula

Explanation / Answer

E19-3 (One Temporary Difference, Future Taxable Amounts, One Rate, Beginning Def

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