Oxford Corporation Began Operations In 2012 And Reports

Be19 2 Oxford Corporation Began Operations In 2012 And Reported Preta

Be19 2 Oxford Corporation began operations in 2012 and reported pretax financial income of $225,000 for the year. Oxford’s tax depreciation exceeded its book depreciation by $40,000. Oxford tax rate for 2012 and years thereafter is 30%. In its December 31, 2012, balance sheet, what amount of deferred tax liability should be reported? Using the information from BE19-2, assume this is the only difference between Oxford’s pretax financial income and taxable income. Prepare the journal entry to record the income tax expense, deferred income taxes, and income taxes payable, and show how the deferred tax liability will be classified on the December 31, 2012, balance sheet.

Paper For Above instruction

Introduction

The calculation and accounting treatment of deferred tax liabilities (DTLs) are vital aspects of financial reporting, capturing future tax consequences of temporary differences between financial statement income and taxable income. For Oxford Corporation, which began operations in 2012, the primary focus is on its reported pretax income, temporary differences arising from depreciation, and the resulting deferred tax liabilities, along with the journal entries to record income tax expense and associated liabilities.

Analysis of Financial and Taxable Income

Oxford's pretax financial income for 2012 was $225,000. However, tax depreciation exceeded book depreciation by $40,000. This difference creates a temporary disparity impacting future tax obligations. Specifically, because the tax depreciation is larger, it reduces taxable income relative to accounting income temporarily. The difference of $40,000 in depreciation will result in a future taxable amount when the book depreciation overtakes tax depreciation, creating a deferred tax liability at year-end.

Calculation of Deferred Tax Liability

The temporary difference is $40,000, attributable to excess tax depreciation. The applicable tax rate is 30%. To determine the deferred tax liability (DTL), multiply the temporary difference by the tax rate:

Deferred Tax Liability (DTL) = $40,000 × 30% = $12,000

Therefore, Oxford should report a deferred tax liability of $12,000 in its December 31, 2012, balance sheet.

Journal Entries for Income Tax Accounting

The accounting for income taxes involves recording current income taxes payable, deferred taxes, and the total income tax expense. Since the temporary difference arises solely from depreciation, the entries are straightforward.

First, determine taxable income. Assuming no other temporary or permanent differences, taxable income equals pretax financial income minus the temporary difference:

Taxable Income = $225,000 - $40,000 = $185,000

Calculate current income tax payable:

Income Tax Payable = Taxable Income × Tax Rate = $185,000 × 30% = $55,500

Next, compute the total income tax expense, which includes current tax and deferred tax:

Total Income Tax Expense = Current Tax + Deferred Tax Expense

The deferred tax expense is the adjustment resulting from the temporary difference. Since the temporary difference will reverse in future periods, the deferred tax liability increases by $12,000.

The journal entry on December 31, 2012, would be:

```plaintext

Debit: Income Tax Expense $67,500

Credit: Income Taxes Payable $55,500

Credit: Deferred Tax Liability $12,000

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Here, Income Tax Expense equals the sum of current tax ($55,500) and deferred tax ($12,000), totaling $67,500. The deferred tax liability is classified as a non-current liability on the balance sheet.

Classification on the Balance Sheet

The deferred tax liability of $12,000 should be reported under non-current liabilities as per accounting standards (such as U.S. GAAP and IFRS), which require deferred taxes arising from temporary differences to be classified based on the nature of the underlying asset or liability.

Conclusion

In summary, Oxford Corporation's deferred tax liability at the end of 2012 amounts to $12,000, arising from the temporary difference in depreciation. The company should record a total income tax expense of $67,500 to reflect current and future tax effects, with the deferred tax liability appropriately classified as a non-current liability on the balance sheet. Proper recognition of deferred taxes ensures accurate reflection of future tax obligations and compliance with accounting standards.

References

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• Financial Accounting Standards Board (FASB). (2019). Accounting Standards Codification (ASC) 740 — Income Taxes. FASB.
• International Accounting Standards Board (IASB). (2019). IAS 12 Income Taxes. IASB.
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