Deferred Tax Assets and Liabilities Fibertek, Inc., computed a pretax financial

Question

Deferred Tax Assets and Liabilities Fibertek, Inc., computed a pretax financial income of $40,000 for the first year of its operations ended December 31, 2008. Included in financial income was $25,000 of nondeductible expenses, $22,000 gross profit on installment sales that was deferred for tax purposes until the installments were collected, and $18,000 in bad debt expense that had been accrued on the books in 2008. The temporary differences are expected to reverse in the following patterns Year Gross Profit on Collections $5,000 7,000 4,000 6,000 $22,000 Bad Debt Write-Offs 6,000 2009 2010 2011 2012 Totals 12,000 $18,000 The enacted tax rates for this year and the next four years are as follows: 40% 35 32 30 32 2008 2009 2010 2011 2012 Prepare the journal entries necessary to record income taxes for 2008. Assume that there will be sufficient income in each future year to realize any deductible amounts. For classification purposes, the bad debt write-offs are considered to be associated with a current asset, and the receivable for installment sales is classified as both current and noncurrent, depending on the expected timing of the receipt.

Explanation / Answer

Solution:

As gross profit on installment sale is deffered for tax purpose, therefore it will give rise to Deferred tax Liability. Further bad debts expenses are deductible in future for tax purpose, therefore it will give rise to Deferred tax assets.

Fibertek INC. Computation of Taxable income and income tax for 2008 Particulars Amount Pretax financial Income $40,000.00 Add: Non deductible expenses $25,000.00 Less: Gross Profit on installment sales $22,000.00 Add: Bad debts expense accrued $18,000.00 Taxable Income $61,000.00 Income tax (40%) $24,400.00

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