Question

South Carolina Corporation has one temporary difference at the end of 2017 that will reverse and cause taxable amounts of \(55,000 in 2018, \)60,000 in 2019, and \(65,000 in 2020. South Carolina’s pretax financial income for 2017 is \)300,000, and the tax rate is 30% for all years. There are no deferred taxes at the beginning of 2017. Instructions (a) Compute taxable income and income taxes payable for 2017. (b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2017. (c) Prepare the income tax expense section of the income statement for 2017, beginning with the line “Income before income taxes.”

Short answer

Theincome tax expense sectionof the financial statement records the amounts related to thefirm's income taxes.It includes thecurrentas well as thedeferred tax expenseamount.

Step-by-step solution

(a) Computation of taxable income and income taxes payable for 2017.

Particulars	Amount
Pretax financial income for 2017	$300,000
Less: Temporary difference at the end
2018	$55,000
2019	$60,000
2020	$65,000
Taxable income for 2017	$120,000
Multiply: Tax rate	30%
Income taxes payable	36,000

Calculation of deferred tax liability

Particulars	2018	2019	2020	Total
Taxable amount	$55,000	$60,000	$65,000	$180,000
Multiply: Tax rate	30%	30%	30%
Deferred tax liability	$16,500	$18,000	$19,500	$54,000

(b) Preparation of journal entry

South Carolina Corporation
Journal entry
Date	Particulars	Debit	Credit
2017	Income tax expense	$90,000
	Income tax payable		$36,000
	Deferred tax liability		$54,000
	(To record the income tax expense)

(c) Preparation of the income tax expense section of the income statement

South Carolina Corporation
Income Statement
Particulars	Amount
Income before income tax	$300,000
Less: Income tax expense
Current tax expense	$36,000
Deferred tax expense	$54,000
Net income	$210,000