Answered: On December 31, 2020, La Puendia…

SWFT Essntl Tax Individ/Bus Entities 2020

23rd Edition

ISBN:9780357391266

Author:Nellen

Publisher:Nellen

Chapter3: Taxes On The Financial Statements

Section: Chapter Questions

Problem 4BCRQ

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Question

On December 31, 2020, La Puendia Company reported the following: Income before tax for accounting purposes, $1,185,000

Rent expense for financial accounting purposes, $150,000

Rent expense for tax purposes,$105,000

Tax depreciation, $300,000

Accounting depreciation $150,000

Loss on a case incurred but not yet paid so tax deductible in the future is $60,000

Income tax rate, 30%

A. What is the deferred tax expense?

B. What is the amount of deferred tax asset?

C. How much is the net income after tax.

Expert Solution

Step 1

Deferred tax:

When accounting income is different from income under tax laws, it is called as deferred tax. Based on the income calculations and tax liability determined, deferred tax asset or liability would arise.

Step 2

A. Calculation of deferred tax expense:

i. Calculation of tax charged on accounting income:

$\begin{array}{rcl} T a x e x p e n s e & = & A c c o u n t i n g i n c o m e \times T a x r a t e \\ = & $ 1, 185, 000 \times 30 % \\ = & $ 355, 500 \end{array}$

ii. Calculation of tax under federal tax :

$\begin{array}{rcl} T a x u n d e r T a x l a w s & = & I n c o m e u n d e r T a x l a w s \times T a x r a t e \\ = & ($ 1, 185, 000 + $ 150, 000 - $ 105, 000 + $ 150, 000 - $ 300, 000) \times 30 % \\ = & $ 1, 080, 000 \times 30 % \\ = & $ 324, 000 \end{array}$

The deferred tax expense is $324,000.

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