The following facts relate to Vaughn Corporation. Compute the amount of pretax f

Question

The following facts relate to Vaughn Corporation.

Compute the amount of pretax financial income for 2017.

Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2017.

Prepare the income tax expense section of the income statement for 2017, beginning with the line “Income before income taxes.

Compute the effective tax rate for 2017.

1. Deferred tax liability, January 1, 2017, $70,200. 2. Deferred tax asset, January 1, 2017, $23,400. 3. Taxable income for 2017, $122,850. 4. Cumulative temporary difference at December 31, 2017, giving rise to future taxable amounts, $269,100. 5. Cumulative temporary difference at December 31, 2017, giving rise to future deductible amounts, $111,150. 6. Tax rate for all years, 40%. No permanent differences exist. 7. The company is expected to operate profitably in the future. Pretax financial income

Explanation / Answer

1 Taxable Income 122850 Add: Future Taxable Income 93600 See Below Note Less: Future Deductible Expense -52650 See Below Note Pretax Financial Income 163800 Amount Temporary Difference Type Opening Deffered Tax Liability 70200 175500 Future Taxable Income Opening Deffered Tax Assets 23400 58500 Future Deductible Expense Tax Rate 40% Working Note: DTA DTL Opening Temporary Difference 58500 175500 Closing Temporary Difference 111150 269100 Difference arising during the period 52650 93600 Future Deductible Expense Future Taxable Income 2 Income Tax Expense Account Dr. 49140 Deffered Tax Asset Dr. 21060 To Deffered Tax Liability 37440 To Income Tax Payable 32760 (Being Income Tax recorded) DTA DTL Closing Temporary Difference 111150 269100 Deffered Impact(40%) 44460 107640 Less: Opening Balance 23400 70200 Charge to PL 21060 37440 Credited to PL Debited to PL Taxable Income 122850 Tax Rate 40% Income Tax Expense 49140 3 Income before Tax 163800 Income Tax Expense Deffered 16380 Current 49140 65520 Net Income/(Loss) 98280 4 Effective Tax Rate: Income Tax Expense 65520 Income before Tax 163800 Effective Tax Rate 40.00%

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