Question

Assume that Firm ABC has revenues of $120,000 for both 2017 and 2018. It also has operating expenses of $40,000 for each of these years. In addition, Firm ABC accrues a loss and related liability of $10,000 for financial reporting purposes because of pending litigation. Firm ABC cannot deduct this amount for tax purposes until it pays the liability, expected in 2018. As a result, a deductible amount will occur in 2018 when Firm ABC settles the liability, causing taxable income to be lower than pretax financial information.

2017 2018
Revenues 120,000 120,000
Expenses 40,000 40,000
Litigation Loss 10,000
Pretax Financial Income 70,000 80,000
Income Tax Expense (40%) 28,000 32,000
2017 2018
Revenues 120,000 120,000
Expenses 40,000 40,000
Litigation Loss 10,000
Taxable Income 80,000 70,000
Income Tax Expense (40%) 32,000 28,000
Q1) Journalize the entry at 12/31/2017 to record income tax expense, deferred tax asset, and income taxes payable:
Q2) Journalize the entry at 12/31/2018 to record income tax expense, deferred tax asset, and income taxes payable:

Answer 1

1) deferred tax asset = 4000

2) deffered tax Liability = 4000

Step-by-step explanation:

1) Journalizing entry at 12/31/2017

deferred tax asset = tax ( per income tax) - tax ( per book tax )

= 32000 - 28000 = 4000

Journal Entry made for Income tax and deferred tax asset)

Account Debit Credit

Income Tax Expense 28000

Deffered Tax Asset 4000

Income Tax Payable 32000

2) Journalizing entry at 12/31/2018

Deffered tax Liability = Tax (per book) - Tax ( Income tax )

deffered tax Liability = 32000 - 28000 = 4000

Journal Entry made for Income tax and deffered tax liability

Account Debit Credit

Income Tax Expense 32000

To Deffered Tax Liability 4000

To Income Tax Payable 28000