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Kara Fashions uses straight-line depreciation for financial statement reporting and MACRS for income tax reporting. Three years after its purchase, one of Kara’s buildings has a book value of $470,000 and a tax basis of $320,000. There were no other temporary differences and no permanent differences. Taxable income was $6 million and Kara’s tax rate is 35%. What is the deferred tax liability to be reported in the balance sheet? Assuming that the deferred tax liability balance was $43,000 the previous year, prepare the appropriate journal entry to record income taxes this year.

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Answer:

Income Tax Expense a/c Dr $ 20,57,000

Deferred Tax Liability a/c Dr $ 43,000

To Income Tax Payable a/c Cr $ 21,00,000

($6 Million x 35%)

Explanation:

The Above will result in timing Difference.

Timing Differences are those which can be reversed in subsequent periods.

Income Tax Expense a/c Dr $ 20,57,000

Deferred Tax Liability a/c Dr $ 43,000

To Income Tax Payable a/c Cr $ 21,00,000

($6 Million x 35%)

( Being Entry Passed for Tax Expense and Timing Difference Adjusted through Deferred Tax Liabilty)

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