Journal Entry: Pretax Financial Income

Journal Entryapretax Financial Income

Identify the core assignment: Prepare journal entries for a company’s deferred tax assets and liabilities, based on pretax financial income, temporary and permanent differences, and applicable tax rates, as well as journalize tax expense and related entries.

Ignore extra instructions, rubric details, due dates, repeated lines, and meta-comments, and focus on the actual task: Creating journal entries related to income taxes for a given period, considering temporary and permanent differences, tax expense calculation, and deferred tax accounting.

Paper For Above instruction

The accounting treatment of income taxes is a critical aspect of financial reporting, requiring companies to recognize current and deferred tax assets and liabilities to reflect the tax effects of the temporary and permanent differences between financial statements and tax return income. The scenario provided involves a company with pretax financial income of $100,000, along with various permanent and temporary differences that impact its taxable income and the measurement of deferred tax assets and liabilities. This paper delineates the process of preparing journal entries to record the relevant income tax components, guided by relevant accounting standards like ASC 740 (formerly FASB Statement No. 109).

Calculation of Income Tax Expense and Related Entries

The pretax financial income of $100,000 serves as the starting point for income tax computations. Permanent differences such as a fine for pollution ($3,500) and tax-exempt interest ($1,400) influence the taxable income but do not affect deferred tax calculations, as these items are non-temporary in nature. The taxable income for the period is therefore adjusted accordingly, resulting in a taxable income of $55,100 (as per the provided data).

The income tax expense recognized on the income statement involves current tax payable and deferred tax components. Assuming a flat tax rate of 40%, the current tax payable amounts to $22,040 (40% of $55,100). The deferred tax liabilities and assets are calculated based on temporary differences. For example, excess warranty expenses, construction profits, and depreciation differences produce deferred tax assets and liabilities reflecting future tax consequences of these timing differences.

Deferred Tax Accounts and Entries

Deferred tax liabilities are recognized for temporary differences that will increase taxable income in future periods, such as excess depreciation, which results in a future tax obligation of $20,000 (40% of $50,000). Conversely, deferred tax assets are recorded for deductible temporary differences, such as excess warranty expenses and construction profits, totaling $1,200 (40% of $3,000).

Journal Entries

The following journal entries record the current and deferred tax components:

- To recognize current income tax expense and payable:

Debit: Income Tax Expense $22,040

Credit: Income Taxes Payable $22,040

Reflecting the current tax liability based on taxable income.

- To record deferred tax liabilities:

Debit: Income Tax Expense $20,000

Credit: Deferred Tax Liability $20,000

Recording the tax effect of excess depreciation difference.

- To record deferred tax assets:

Debit: Deferred Tax Asset $1,200

Credit: Income Tax Expense $1,200

Recognizing future tax savings from temporarily deductible differences.

These entries ensure proper recognition of the tax effects of timing differences in accordance with accounting standards.

Conclusion

Proper journalization of current and deferred income taxes hinges on accurately identifying temporary and permanent differences, applying the appropriate tax rates, and recording the related journal entries. The approach ensures clarity in financial statements, compliance with accounting standards, and accurate reflection of future tax implications.

References

  • FASB Accounting Standards Codification (ASC) Topic 740, Income Taxes. (2023). Financial Accounting Standards Board.
  • Ernst & Young. (2022). IFRS and US GAAP: Income Tax Accounting Overview. EY Publications.
  • Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2020). Intermediate Accounting: IFRS Edition. Wiley.
  • Podhorzer, M. (2018). Deferred Tax Accounting and Reporting. Journal of Accountancy, 226(2), 52–57.
  • Harrison, B., & Fredenberger, W. (2019). Understanding Deferred Taxes: An Analytical Approach. The CPA Journal, 89(4), 34–39.
  • Arnold, R. (2021). Practical Guide to Accounting for Income Taxes. Wiley & Sons.
  • Thompson, K. (2020). The Impact of Temporary Differences on Financial Statements. Accounting Today.
  • Miller, J., & Pettit, M. (2021). Tax Accounting and Deferred Tax Recognition. CPA Journal.
  • Financial Executives International (FEI). (2022). Income Tax Accounting Best Practices. FEI Publications.
  • United States Department of the Treasury. (2023). Internal Revenue Code: Corporate Taxation. IRS Publications.

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