Giada Foods Reported 940 Million Income Before Tax

Giada Foods Reported 940 Million In Income Before Income Taxes For 20

Giada Foods reported $940 million in income before income taxes for 2021, its first year of operations. Tax depreciation exceeded depreciation for financial reporting purposes by $100 million. The company also had non-tax-deductible expenses of $80 million relating to permanent differences. The income tax rate for 2021 was 25%, but the enacted rate for years after 2021 is 30%. The balance in the deferred tax liability in the December 31, 2021, balance sheet is (5pts): A. $16 million B. $25 million C. $30 million D. $54 million What would be the full journal entry to record the above amount (3 pts)?

Paper For Above instruction

The assignment requires determining the balance of the deferred tax liability as of December 31, 2021, based on Giada Foods’ financial and tax information, and then to prepare the journal entry to recognize this deferred tax liability. This analysis involves understanding temporary differences arising from accelerated tax depreciation and permanent differences affecting taxable income, applying relevant tax rates, and accurately recording the deferred tax liability in journal form.

Introduction:

Deferred tax liabilities (DTLs) represent taxes payable in the future due to temporary differences between financial accounting income and taxable income. In Giada Foods’ first year of operations, 2021, these differences primarily stem from depreciation methods and non-deductible expenses. This paper will analyze the tax implications of these differences, calculate the DTL, and outline the journal entry to record it.

Analysis of Temporary Differences:

Giada’s pre-tax accounting income is $940 million. Adjustments for tax purposes are necessary to compute taxable income. These adjustments include the difference in depreciation and permanent differences:

1. Tax Depreciation vs. Financial Depreciation:

Tax depreciation exceeds financial depreciation by $100 million, implying that for tax purposes, depreciation expense is higher by this amount. This results in a temporary difference because the depreciation expense reported for financial statements is lower than for tax purposes, leading to a deferred tax liability.

2. Non-tax-deductible Expenses:

Non-deductible expenses of $80 million for permanent differences do not affect deferred taxes since they do not reverse over time—they impact current tax expense. Therefore, these are not included when calculating deferred tax liabilities but are relevant for current tax adjustments.

Calculating Taxable Income:

Taxable income is derived from financial income adjusted for the temporary differences:

- Start with income before taxes: $940 million

- Add tax depreciation excess (since it reduces taxable income): +$100 million

- Remove permanent differences (since they do not affect future taxes): no effect on deferred taxes

Taxable income = $940 million + $100 million = $1,040 million

Deferred Tax Liability Calculation:

The temporary difference relevant for deferred tax is $100 million. With an enacted tax rate of 25% for 2021, the deferred tax liability (DTL) is:

DTL = Temporary difference × Tax rate

DTL = $100 million × 25% = $25 million

This matches option B, indicating that the deferred tax liability is $25 million.

Journal Entry:

To record the deferred tax liability, Giada Foods would make the following journal entry:

Debit: Income Tax Expense — Deferred $25 million

Credit: Deferred Tax Liability $25 million

This entry recognizes the future tax obligation arising from temporary differences. As rates change in subsequent years, the liability must be adjusted accordingly.

Conclusion:

Based on the analysis, the balance in the deferred tax liability as of December 31, 2021, is $25 million. The proper journal entry to record this liability involves increasing both income tax expense and deferred tax liability accounts by $25 million.

References:

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- International Financial Reporting Standards (IFRS). (2023). IAS 12 Income Taxes.

- Financial Accounting Standards Board (FASB). (2021). Accounting Standards Update No. 2019-12 on Income Taxes.

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