When will income tax expense and income taxes payable be equal?
When there are no differences between book and tax reporting.
What is book income?
The amount of income that a company reports in its financial statements.
What is taxable income?
The amount of income that a company reports on its tax return.
Book Income: $425,000
Tax rate: 30%
No Book/Tax differences - What is the journal entry for income tax expense?
Income Tax Expense 127,500 (425,000 * .3)
Income Tax Payable: 127,500
Otis began business in 2022. Billed but did not collect $500,000 in revenue. Both book and income tax. Tax rate: 35% Otis will pay any income taxes due in 2023. Journal entries for income tax expense in 2022? What accounts and amounts will Otis report on its balance sheet?
2022 Book Income:
Sales: 500,000
Income Tax Expense: 175,000
Profit: 325,000
Income Tax Expense 175,000 (500,000 * .35)
Income Tax Payable: 175,000
Assets:
Accounts Receivable: 500,000
Liabilities:
Income Tax Payable: 175,000
Stockholders Equity:
Net Income: 325,000
What is a permanent difference in book income and taxable income?
Results in transaction that include in the computation of taxable income but never in book income and vise versa.
What are differences that result in permanent differences in Book Income>Taxable Income
1.) Municipal Interest Income: Not taxable.
2.) Dividend received deduction: Deduction of a portion of intercorporate dividends received
3.) Life Insurance death proceeds for key officers of employees.
Differences that result in Taxable Income > Book Income
1.) Fines and Penalties. Reported as expenses but not tax deductible
2.) Certain meals and entertainment expenses: reported as expenses but not fully tax deductible
3.) Life Insurance premiums paid for key officers or employees
4.) Expense incurred in securing tax-exempt income: Subtracted from earnings bu not deductible for tax purposes
Income Before Taxes: $410,000
Tax Rate: 20%
Included $30,000 of municipal interest in the $410,000
No other book-tax differences. What is income tax expense?
Municipal Interest is not taxable. $410,000 - 30,000 = 380,000
380,000 * .20 = 76,000
Income Tax Expense 76,000
Income Tax Payable 76,000
Dante Inc reproted fines and penalties on their income statement this year. What are the book-tax differences?
Taxable Income will be greater than book income. Penalties and Fees decrease book income because they are an expense. However, they are added back into taxable income because they are not tax deductible. Permanent difference.
Income Before Taxes: $500,000
Tax Rate: 40%
$30,000 in Fines and Penalties included in the $500,000. What is Income Tax Payable?
Fines and Penalties are not tax deductible.
$500,000 + $30,000 = 530,000
530,000 * .40 = 212,000
Income Tax Payable is $212,000.
Recorded a dividends received deduction on tax return. What book-tax difference will result?
Book Income will be greater than taxable income because Dividnds received deductions are tax deductible. Permanent difference.
Income Before Taxes: $810,000
Tax Rate: 50%
$50,000 of fully deductible inter-corporate dividends received in the $810,000. What is income tax payable?
Book Income: $810,000
Taxable Income: $810,000 - 50,000 = 760,000
Income Tax Payable: $760,000 * .5 = 380,000
Media Corp incurred $25,000 in expenses associated with tax-exempt income. What book-tax difference will result?
Expenses associated with attempts to secure tax-exempt income are not tax deductible. They must be added back into taxable income. Taxable income will be greater than book income by $25,000. Permanent difference.
Income Before Taxes: $900,000
Tax Rate: $25,000
Included in the $900,000 is $70,000 of municipal bond interest and $10,000 in fines and penalties. What is the net amount of book-tax difference?
Muinicipal bond interest is tax deductible, while fines and penalties are not tax deductible. Municipal Bond interest leads to a $70,000 increase in book over taxable income. That is reduced by $10,000 in fines and penalties. Net amount of book and tax difference is $60,000. Book Income is greater than taxable income by $60,000.
Began Business in 2022. Billed, but not did collect $500,000 in revenue. Received $40,000 of municipal bond interest revenue. 35% Tax Rate. What journal entries are required to record the revenues and related income tax for the years?
Book Income: $500,000 + $40,000 = $540,000
Income Tax Expense: 175,000 ($40,000 not taxable)
Profit: 351,000
Taxable Income: 500,000
Income Tax Payable: 175,000
Sales Journal Entry
Accounts Receivable 500,000
Sales Revenue 500,000
Interest Revenue
Cash 40,000
Interest Revenue 40,000
Income Tax
Income Tax Expense 175,000
Income Tax Payable 175,000
What is the statutory tax rate?
Legally imposed rate in a given taxing jurisdiction.
What is the effective tax rate? (ETR)
Income tax expense/ book income before taxes
Permanent Differences and Income Tax
When there are permanent differences, companies record both income tax expense and income tax payable on the financial statements.
What are temporary differences?
Book treatment and tax treatment are different in a given year but will be the same over the life of the firm.
Deferred Tax Assets
future reduction in income taxes payable.
Deferred Tax Liabilities
additional income taxes payable that will be due in future years.
How are deferred tax assets and deferred tax liabilities created?
Deferred taxes are only created by temporary differences. Over the life of the firm, these differences reverse themselves.
Deferred Tax Asset Exist..
Tax Basis of Asset>Book Basis Asset
Book Basis Liability > Tax Basis Liability
