If taxable income is $120 000, accounting profit is $130 000, interest receivable is $10 000, interest is recognised for tax when received and the tax rate is 30%, then we know that tax payable is
$36 000, tax expense is $39 000 and a deferred tax liability of $3000 will be recorded in the balance sheet.

Question

Quizplus · Accepted Answer

Taxable income is used to calculate tax payable, which is 30% of $120 000 = $36 000. Since interest is recognised for tax when received, no interest income will be included in taxable income, so the accounting profit of $130 000 is irrelevant for tax purposes. The deferred tax liability of $3000 is calculated by taking the difference between the tax base (zero, since interest is not taxable until received) and the accounting base ($10 000, which has been received but not yet taxed). Therefore, the tax expense will be the sum of tax payable ($36 000) and the change in deferred tax liability ($3000), which equals $39 000.

If Taxable Income Is $120 000, Accounting Profit Is $130