C is corrent. Deferred taxes are only created by temporary differences or, in other words, differences that will reverse. The depreciation expense is a temporary difference because, although differing amounts may be reported each year, total depreciation over the life of any asset will be the same for both financial reporting and tax purposes. The interest income on municipal obligations is a permanent difference because this income is never taxable. Since depreciation expense is $200,000 ($500,000 – $300,000) greater for tax purposes than for accounting purposes, payment of $60,000 ($200,000 × 30%) of taxes is deferred to future periods. The entry is
| Income tax expense (deferred portion) |
60,000 |
|
| Deferred tax liability |
|
60,000 |
The $60,000 must be reported as the deferred taxes component of income tax expense on the current period’s income statement.
D is incorrect. Deferred taxes are only created by temporary differences or, in other words, differences that will reverse. The depreciation expense is a temporary difference because, although differing amounts may be reported each year, total depreciation over the life of any asset will be the same for both financial reporting and tax purposes. The interest income on municipal obligations is a permanent difference because this income is never taxable. Since depreciation expense is $200,000 ($500,000 – $300,000) greater for tax purposes than for accounting purposes, payment of $60,000 ($200,000 × 30%) of taxes is deferred to future periods. The entry is
| Income tax expense (deferred portion) |
60,000 |
|
| Deferred tax liability |
|
60,000 |
The $60,000 must be reported as the deferred taxes component of income tax expense on the current period’s income statement.
A is incorrect. Deferred taxes are only created by temporary differences or, in other words, differences that will reverse. The depreciation expense is a temporary difference because, although differing amounts may be reported each year, total depreciation over the life of any asset will be the same for both financial reporting and tax purposes. The interest income on municipal obligations is a permanent difference because this income is never taxable. Since depreciation expense is $200,000 ($500,000 – $300,000) greater for tax purposes than for accounting purposes, payment of $60,000 ($200,000 × 30%) of taxes is deferred to future periods. The entry is
| Income tax expense (deferred portion) |
60,000 |
|
| Deferred tax liability |
|
60,000 |
The $60,000 must be reported as the deferred taxes component of income tax expense on the current period’s income statement.
B is incorrect. Deferred taxes are only created by temporary differences or, in other words, differences that will reverse. The depreciation expense is a temporary difference because, although differing amounts may be reported each year, total depreciation over the life of any asset will be the same for both financial reporting and tax purposes. The interest income on municipal obligations is a permanent difference because this income is never taxable. Since depreciation expense is $200,000 ($500,000 – $300,000) greater for tax purposes than for accounting purposes, payment of $60,000 ($200,000 × 30%) of taxes is deferred to future periods. The entry is
| Income tax expense (deferred portion) |
60,000 |
|
| Deferred tax liability |
|
60,000 |
The $60,000 must be reported as the deferred taxes component of income tax expense on the current period’s income statement.
