|
Fundamentals of Tax Accruals |
 |
 |
 |
  
|
Computing the Tax Provision
The following illustration best demonstrates the methodology for computing the tax provision.
In 19X1, Bizzer Corporation had pretax accounting income of $520,000. Included in this number were the following transactions:
- Municipal interest of $10,000
- Entertainment expenses of $6,000
- Book depreciation of $20,000; Tax depreciation is $30,000
- Charitable contribution carryover from the prior year (deductible this year) of $8,000
The corporate tax rate for the year is 30%.
| |
Book
 |
Tax
|
| Pretax Accounting Income |
$520,000
|
$520,000
|
Permanent Differences
Municipal Interest |
<10,000> |
<10,000> |
| Entertainment (50% of $6,000) |
3,000
|
3,000
|
Temporary Differences
Tax Depreciation Over Book
($30,000 – $20,000) |
|
<10,000> |
Charitable
Contribution Carryover
|
|
<8,000>
|
Book Taxable Income
|
$513,000
|
|
| Tax Taxable Income
|
|
$495,000
|
Tax @ 30% |
$153,900
|
$148,500
|
Plugging these numbers into the tax accrual formula provides the following results:
|
Financial Statement
Tax Expense |
= |
Current
Tax Liability |
+ |
Deferred Taxes |
|
| |
$153,900 |
= |
$148,500 |
+ |
? |
|
The difference between the tax expense and tax liability is $5,400 ($153,900 - $148,500). Because the deferred tax amount is a positive figure, it will be entered on the books as a deferred tax liability.
|
Note that the deferred tax figure can be checked by examining the timing differences. In this case, the deferred taxes should equal the sum of the timing differences multiplied by the tax rate.
($10,000 + $8,000) @ 30% = $5,400
|
The journal entry to enter this transaction on the books would look like this:
|
|
Copyright © 1998 Bizzer Professional Training |
|
|