Question

The differences between the book basis and tax basis of the assets and liabilities of Castle Corporation at the end of 2016 are presented below. Book Basis Tax Basis Accounts receivable \(50,000 \)–0– Litigation liability 30,000 –0– It is estimated that the litigation liability will be settled in 2017. The difference in accounts receivable will result in taxable amounts of \(30,000 in 2017 and \)20,000 in 2018. The company has taxable income of $350,000 in 2016 and is expected to have taxable income in each of the following 2 years. Its enacted tax rate is 34% for all years. This is the company’s first year of operations. The operating cycle of the business is 2 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 will be reported on the balance sheet at the end of 2016.

Short answer

The journal entry in the above question will be passed using the amount of accounts receivable and the litigation liabilityas deferred tax asset and liabilitywith its respective income tax rates.

Step-by-step solution

(a) Passing of the journal entry

Date	Particulars	Debit	Credit
2016	Income tax expense	125,800
	Deferred tax asset$\left(\$30,000\times 34\%\right)$	$10,200
	Income tax payable $\left(\$350,000\times 34\%\right)$		$119,000
	Deferred tax liability $\left(\$50,000\times 34\%\right)$		$17,000
	(To record the tax expense)

(b) indication of the amounts

Balance Sheet
Liabilities	Amount
Long-term liabilities
Net deferred tax liability $\left(\$17,000-\$10,200\right)$	$6,800
Current liabilities
Income tax payable	$119,000