Financial Accounting: An Integrated Statements Approach, 2nd Edition

$120,000 ($300,00040%). However, to reduce the amount owed for current income

taxes, the corporation uses tax planning to reduce the taxable income to $100,000. Thus,

the income tax actually due for the year is only $40,000 ($100,000 40%), and $80,000

of income tax is deferred to future years, calculated as follows:

Income tax based on $300,000 reported income at 40% $120,000

Income tax based on $100,000 taxable income at 40% 40,000

Income tax deferred to future years $ 80,000

The difference between taxable income and income before taxes is deferred to

future periods. This allows the current year’s tax expense to be matched against the

current year’s revenues on the income statement, using the following journal entry.

The income tax expense reported on the income statement is the total tax, $120,000,

expected to be paid on the income for the year. The actual amount owed currently is

the $40,000 shown on the tax return.

The $80,000 ($120,000 $40,000) difference between the tax expense on the income

statement and the amount owed on the tax return is often temporary. That is, tax plan-

ning often delays the tax recognition of revenue and accelerates the tax recognition of

expenses. In future years, the $80,000 in Deferred Income Tax Expense will be trans-

ferred to Income Tax Payable as the temporary differences reverse and the tax becomes

due.

For example, if the $48,000 of the deferred tax reverses and becomes due in the sec-

ond year, the following journal entry would be made in the second year:

The deferred income tax expense account represents the portion of income tax expense

that will be paid to the government at a later date and appears on the balance sheet as

a deferred liability. The deferred liability appears as a long-term liability if it will not

reverse within the next year. When the deferred expense is due to reverse within one

year, it is classified on the balance sheet as a current liability.

460 Chapter 10 Liabilities

Ta x

Return

Income

Statement

Taxable income

Less: Income tax

owed to IRS

After-tax income

Income before taxes

Less: Tax expense

Net income

Differences

Exhibit 14

Tax Differences between

Tax Return and Income

Statement

Income Tax Expense 120,000

Income Tax Payable 40,000

Deferred Income Tax Expense 80,000

SCF BS IS

— Lc SET Ec

Deferred Income Tax Expense 48,000

Income Tax Payable 48,000

SCF BS IS

— LcT —