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The following facts relate to Duncan Corporation. 1. Deferred tax liability, January 1, 2014,...

Question:

The following facts relate to Duncan Corporation.

1. Deferred tax liability, January 1, 2014, $119,280.

2. Deferred tax asset, January 1, 2014, $39,760.

3. Taxable income for 2014, $208,740.

4. Cumulative temporary difference at December 31, 2014, giving rise to future taxable amounts, $417,480.

5. Cumulative temporary difference at December 31, 2014, giving rise to future deductible amounts, $188,860.

6. Tax rate for all years, 40%. No permanent differences exist.

7. The company is expected to operate profitably in the future.

a. Compute the amount of pretax financial income for 2014.

Pretax financial income $_____

b. Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2014. (Credit account titles are automatically indented when the amount is entered. Do not indent manually.)

Account Titles and Explanation Debit Credit

c. Prepare the income tax expense section of the income statement for 2014, beginning with the line Income before income taxes?

Duncan Corporation

Income Statement (Partial)

Year ended December 31, 2014

Dividends Expenses Income before Income Taxes Income Tax Expense-Current Income Tax Expense-Deferred Net Income / (Loss)Retained Earnings, January 1 Retained Earnings, December 31 Revenues Total Expenses Total Revenues $
Dividends Expenses Income before Income Taxes Income Tax Expense-Current Income Tax Expense-Deferred Net Income / (Loss)Retained Earnings, January 1Retained Earnings, December 31Revenues Total Expenses Total Revenues $
Dividends Expenses Income before Income Taxes Income Tax Expense-Current Income Tax Expense-Deferred Net Income / (Loss)Retained Earnings, January 1 Retained Earnings, December 31 Revenues Total Expenses Total Revenues
Dividends Expenses Income before Income Taxes Income Tax Expense-Current Income Tax Expense-Deferred Net Income / (Loss)Retained Earnings, January 1 Retained Earnings, December 31 Revenues Total Expenses Total Revenues $

d. Compute the effective tax rate for 2014.

The effective tax rate _____ %

Deferred Taxes:

Deferred taxes arising from the differences between the Company's taxable income and its accounting profit. In this case study, we will calculate the deferred taxes generated by these temporary differences, we will also calculate the income tax payable in 2014, as recorded in the daily book and as presented in the income statement. We will know the procedure to calculate the effective tax rate.

Answer and Explanation:

a. The Pretax Financial income for 2014 is the following:

Taxable Income 2014 $208,740
Plus: Accumulated temporary difference as of December 31, 2014,   of future taxable amounts $417,480
Less: Accumulated temporary difference, as of December 31, 2014,   of future deductible amounts $188,860
Pretax Financial Income 2014 $437,360

Pretax financial income $437,360

b. Calculate Deferred Tax and Income tax Payable

Accumulated   temporary difference as of December 31, 2014, of future taxable amounts $417,480
Tax rate 40%
Deferred tax   liability 2014 $166,992
Less:   Deferred tax liability, January 1, 2014 $119,280
Tax Expense   (Benefit) $47,712
Accumulated temporary   difference, as of December 31, 2014, of future deductible amounts $188,860
Tax rate 40%
Deferred tax   asset 2014 $75,544
Less:   Deferred tax asset, January 1, 2014 $39,760
Tax Expense   (Benefit) $35,784
Taxable income for 2014 $208,740
Tax rate 40%
Tax Expense $83,496

Journal entry

Date Account Debit Credit
12/31/2014 Deferred Tax Asset $35,784
Tax Expense $95,424
Deferred Tax Liability $47,712
Income Tax Payable $83,496

c. The income tax expense section of the income statement for 2014

Income Before Income Tax $437,360
Income tax
Current expense $83,496
Deferred expense $11,928 $95,424
Net income 2014 $341,936

d. The effective tax rate 2014

ETR = Total Tax / Income Before income Tax

ETR = $95,424 / $437,360 = 22%

The effective tax rate: 22%


Learn more about this topic:

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Interperiod Tax Allocation: Permanent & Temporary Differences

from Accounting 202: Intermediate Accounting II

Chapter 8 / Lesson 4
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