Calculating and Reporting Income Tax Expense Lynch Company b

Calculating and Reporting Income Tax Expense

Lynch Company began operations in 2016. The company reported $22,000 of depreciation expense on its income statement in 2016 and $24,000 in 2017. On its tax returns, Lynch deducted $34,000 for depreciation in 2016 and $39,000 in 2017. The 2017 tax return shows a tax obligation (liability) of $18,200 based on a 40% tax rate.

Required
a. Determine the temporary difference between the book value of depreciable assets and the tax basis of these assets at the end of 2016 and 2017.

b. Calculate the deferred tax liability for each year.

c. Calculate the income tax expense for 2017.
$Answer

Solution

Answers

Accounting

Income Taxes

Temporary Difference

Deferred Tax expense

[A]

[B]

[C = B – A]

[D = C x 40% tax rate]

2016 Depreciation expense

$       22,000.00

$                34,000.00

$                12,000.00

$ 4,800.00

2017 Depreciation expense

$       24,000.00

$                39,000.00

$                15,000.00

$ 6,000.00

Temporary Differences:

2016

$       12,000.00

2017

$       15,000.00

Deferred Tax liability balance

2016

$          4,800.00

2017

$       10,800.00   [ 4800 + 6000]

Income Tax expense for 2017

Income Tax Payable

$       18,200.00 [given]

Deferred Tax expense 2017

$          6,000.00 [calculated in working]

Income Tax expense for 2017

$       24,200.00 [ 18200 + 6000]