Question

Nadal Inc. has two temporary differences at the end of 2016. The first difference stems from installment sales, and the second one results from the accrual of a loss contingency. Nadal’s accounting department has developed a schedule of future taxable and deductible amounts related to these temporary differences as follows. 2017 2018 2019 2020 Taxable amounts \(40,000 \)50,000 \(60,000 \)80,000 Deductible amounts (15,000) (19,000) \(40,000 \)35,000 \(41,000 \)80,000 As of the beginning of 2016, the enacted tax rate is 34% for 2016 and 2017, and 38% for 2018–2021. At the beginning of 2016, the company had no deferred income taxes on its balance sheet. Taxable income for 2016 is $500,000. Taxable income is expected in all future years. Instructions (a) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2016. (b) Indicate how deferred income taxes would be classified on the balance sheet at the end of 2016.

Short answer

The deferred amounts of the income tax are calculated by usingthe future taxable amounts and their respective tax rate. This calculation gives the organization the amount for its deferred asset/liability.

Step-by-step solution

Working notes for the calculation of deferred tax asset/liability for the year 2016

Temporary difference	Taxable amounts	Tax rate	Deferred tax asset	Deferred tax liability
Installment sale	$40,000	34%		$13,600
Installment sale $\left(\$50,000+\$60,000+\$80,000\right)$	$190,000	38%		$72,200
Loss accruals $\left(\left(\$15,000\right)+\left(\$19,000\right)\right)$	($34,000)	38%	($12,920)
Total	$196,000		($12,920)	$85,800

(a) Recording of the journal entry for the year 2016

Date	Particulars	Debit	Credit
2016	Income tax expense	$242,880
	Deferred tax asset	$12,920
	Income tax payable $(\$500,000\times 34\%)$		$170,000
	Deferred tax liability		$85,800
	(To record the income tax expense)

(b) Indication of the amounts in the balance sheet

Balance sheet
Liabilities	Amount
Current liabilities
Deferred tax liability	$85,800
Assets	Amount
Other assets
Non-current assets
Deferred tax asset	$12,920