A company reports pretax accounting income of $8 million, but because of a singl

Question

A company reports pretax accounting income of $8 million, but because of a single temporary difference, taxable income is only $5 million. No temporary differences existed at the beginning of the year, and the tax rate is 30%.

   

Prepare the appropriate journal entry to record income taxes. (If no entry is required for an event, select "No journal entry required" in the first account field. Enter your answers in millions rounded to 1 decimal place (i.e., 5,500,000 should be entered as 5.5).)

A company reports pretax accounting income of $8 million, but because of a single temporary difference, taxable income is only $5 million. No temporary differences existed at the beginning of the year, and the tax rate is 30%.

Explanation / Answer

Solution:

Journal Entry to record income taxes:

Here, Income tax will be payable on $5million at 30% rate but because of the temporary difference the same will be reversed in future years hence a deferred tax liability is created of $900,000 which will be paid in future years.

Particulars Amount ($) Amount ($) Income tax provision 2,400,000             Income tax payable 1,500,000             Deferred tax liability 900,000

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