Exercise 19-20 (Part Level Submission) The differences between the book basis an
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Question
Exercise 19-20 (Part Level Submission)
The differences between the book basis and tax basis of the assets and liabilities of Flint Corporation at the end of 2016 are presented below.
Book Basis
Tax Basis
Accounts receivable $50,600 $0
Litigation liability 31,500 0
It is estimated that the litigation liability will be settled in 2017. The difference in accounts receivable will result in taxable amounts of $27,900 in 2017 and $22,700 in 2018. The company has taxable income of $373,000 in 2016 and is expected to have taxable income in each of the following 2 years. Its enacted tax rate is 34% for all years. This is the company’s first year of operations. The operating cycle of the business is 2 years.
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(a)
Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2016. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)
Account Titles and Explanation
Debit
Credit
Explanation / Answer
Accounts receivable will create a Deferred tax liability as it will create a timing difference between accounting income (included) and taxable income (will be included in coming years )
Litigation liability will create a deferred tax asset as it will create a difference between accounting income (subtracted )and taxable income (will be subtracted in 2017)
When taxable income is higher than accounting income ,Deferred tax asset will be created .and If taxabke income is lower ,deferred tax liability will be created.
Net effect : 50600 DTL-31500 DTA = 19100 DTL
Date Account title Debit credit Income tax expense 133314 Deferred tax liability [19100*.34] 6494 Income tax payable [373000*.34 ] 126820 [Income tax expense recorded]Related Questions
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