Amazing Accountants (AA) opened business on January 1, 20X2. It uses straight li

Question

Amazing Accountants (AA) opened business on January 1, 20X2. It uses straight line depreciation for financial reporting purposes. No accounts were written off during 20X2. AA also took out a $1,000,000 life insurance policy on its owner/partner for a yearly premium of $1,200, whereby the company is the beneficiary of the policy. The following data applies to AA at year end and December 21, 20X2. Current Assets & Current Liabilities: Accounts Receivable: $20,000 Allow. For Doubt Accts: (1,000) Unearned Rev. (Retainers): 4,500 Property, Plant, Equip: Office Equipment Cost: $200,000 Accum Deprec. (Straight line) 20,000 Accum Deprec. (MACRS) 28,580 Other: Income Before Tax Per books at 12/31/X2: $250,000 Income Tax Rate: 30% 1.) Record the 12/31/X2 income tax journal entry. Complete the tax schedule leading up to the Journal Entries. Show Calculations. 2.) What is an example of a temporary tax difference and give an example? 3.) What is an example of a non-temporary tax difference and give an example?

Explanation / Answer

Ans: (Amount in $)

(1) Income Tax Journal Entry:

Provision for Income Tax (Expenses) A/c Dr. 75000

To Income Tax Payable (A/c) Cr. 75000

(Being provision of income tax as on 12/31/X2)

(2) Temporary (or timing) differences between book income versus taxable income are due to items of revenue or expense that are recognized in one period for taxes, but in a different period for the books.

Example of Temporary tax difference are following:

(a) Depreication calculation as per straight line method as per books and wdv method as per tax

(b) Provision for expenses allowed as per books but allowed in IT calculation on payment basis like: any statutory dues

(3) Example of non-temporay tax differces:

     Permanent differences are differences that never reverse.

(a) Any expenses debited in profit and loss account as per accounts but not deducted from income as per IT Act.

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