Question

Milo Manufacturing uses straight-line depreciation for financial statement reporting and is able to deduct 100% of the cost of equipment in the year the equipment is purchased for tax purposes. Four years after its purchase, one of Milo's manufacturing machines has a book value of $620,000. There were no other temporary differences and no permanent differences. Taxable income was $12 million and Milo’s tax rate is 25%. What is the deferred tax liability to be reported in the balance sheet? Assuming that the deferred tax liability balance was $185,000 the previous year, prepare the appropriate journal entry to record income taxes this year.

Answer 1

Solution:

Tax basis of machine = 0

Book basis of machine = $620,000

Required balance in deferred tax liability at the end of year = $620,000 * 25% = $155,000

Current balance in deferred tax liability = $185,000

Reversal of deferred tax to be recorded in this year = $185,000 - $155,000 = $30,000

Income tax payable for the year = $12,000,000 * 25% = $3,000,000

Journal Entries
Event	Particulars	Debit	Credit
1	Income tax expense Dr	$2,970,000.00
	Deferred tax liability Dr	$30,000.00
	To Income taxes payable		$3,000,000.00
	(To record income tax expense)