Sherman Company uses an accelerated depreciation method for income tax purposes and the straight-line depreciation method for financial reporting purposes.As of December 31, 2010, Sherman has a deferred tax liability balance related to depreciation temporary differences of $80, 000.In 2011, depreciation for income tax purposes was $260, 000, while depreciation for financial reporting purposes was $200, 000.If the income tax rate is 30%, no other temporary or permanent differences exist, and taxable income is $300, 000, the entry to record income tax expense on December 31, 2011, would include a

Question

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The deferred tax liability balance related to depreciation temporary differences at the end of 2011 can be calculated as follows:
Deferred tax liability balance (end of 2010) = $80,000
Depreciation temporary difference for 2011 = $260,000 – $200,000 = $60,000
Deferred tax liability balance (end of 2011) = $80,000 + $60,000 = $140,000

The income tax expense for 2011 can be calculated as follows:
Taxable income = $300,000
Income tax rate = 30%
Income tax expense = $300,000 x 30% = $90,000

The change in the deferred tax liability balance during the year (i.e., $140,000 – $80,000) is $60,000, which represents the tax effect of the depreciation temporary difference for the year. Therefore, the entry to record income tax expense on December 31, 2011, would include a debit to Income Tax Expense for $90,000 and a credit to Income Taxes Payable for $90,000.

Sherman Company Uses an Accelerated Depreciation Method for Income Tax