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26 August, 05:25

Milo Manufacturing uses straight-line depreciation for financial statement reporting and is able to deduct 100% of the cost of equipment in the year the equipment is purchased for tax purposes. Four years after its purchase, one of Milo's manufacturing machines has a book value of $660,000. There were no other temporary differences and no permanent differences. Taxable income was $16 million and Milo's tax rate is 25%. What is the deferred tax liability to be reported in the balance sheet? Assuming that the deferred tax liability balance was $205,000 the previous year, prepare the appropriate journal entry to record income taxes this year.

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  1. 26 August, 05:56
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    Part a: The Deferred Tax Liability is $165,000.

    Part b: The Journal Entry is as indicated in the explanation.

    Explanation:

    Part a:

    Tax basis of machine = 0

    Book basis of machine = $660,000

    Required balance in deferred tax liability at the end of year is given as

    ($660,000-0) * 25% = $165,000

    So the Deferred Tax Liability is $165,000.

    Part b:

    Current balance in deferred tax liability = $205,000

    Reversal of deferred tax to be recorded in this year = $205,000 - $165,000 = $40,000

    Income tax payable for the year = $16,000,000 * 25% = $4,000,000

    Journal Entries

    Event Particulars Debit Credit

    1 Income tax expense Dr $3,960,000.00

    Deferred tax liability Dr $40,000.00

    To Income taxes payable $4,000,000.00

    (To record income tax expense)
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