Question

In year 1, Casa Corp. has depreciation expense for income statement purposes of $20,000. The depreciation deduction on the tax return was $30,000. The enacted tax rate is 40%. Casa's pretax income for the year was $100,000, and its taxable income was $90,000. If this is the only difference between pretax income and taxable income, the journal entry to record tax expense for the year would include which of the following entries?
i. credit deferred tax liability of $36,000
ii. debit tax expense of $40,000
iii. credit deferred tax liability of $4,000
iv. credit taxes payable of $36,000
v. debit deferred tax asset of $10,000

Answer 1

Based on the tax rate, the pretax income, and the taxable income the following entries should be recorded:

• Credit deferred tax liability of $4,000.
• Debit tax expense of $40,000.
• Credit taxes payable of $36,000.

Why should these entries be made?

The entire tax will be debited to the tax expense account which is:

= 100,000 x 40%

= $40,000

The taxes payable however, will be based on taxable income:

= 90,000 x 40%
= $36,000

The deferred tax liability will be the difference between tax expense and tax payable:

= 40,000 - 36,000

= $4,000

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