Onyx Company's income statement shows net profit before income tax of $38 000. The company's tax return shows taxable income of $34 000. Company's tax rate is 30%. Which of the following entries would be used to record tax expense and tax payable?
A)Debit Income tax expense $11 400, credit Deferred tax liability $1 200 and credit Income tax payable $10 200.
B)Debit Deferred tax liability $10 200 and credit Income tax payable $10 200.
C)Debit Deferred tax liability $1 200, debit Income tax expense $10 200 and credit Income tax payable $11 400.
D)Debit Income tax expense $10 200 and credit Cash $10 200.

Question

Quizplus · Accepted Answer

The tax expense is calculated on the net profit before tax ($38,000 * 30% = $11,400), while the tax payable is based on taxable income ($34,000 * 30% = $10,200). The difference of $1,200 is recorded as a deferred tax liability.

Onyx Company's Income Statement Shows Net Profit Before Income Tax