Shane Company uses an accelerated depreciation method for income tax purposes and the straight-line depreciation method for financial reporting purposes. As of December 31, 2014, Shane has a deferred tax liability balance related to depreciation temporary differences of $80,000. In 2015, depreciation for income tax purposes was $360,000, while depreciation for financial reporting purposes was $300,000. If the income tax rate is 30%, no other temporary or permanent differences exist, and taxable income is $400,000, the entry to record income tax expense on December 31, 2015, would include a

Question

Quizplus · Accepted Answer

The deferred tax liability related to depreciation temporary differences increased by $60,000 in 2015 ($360,000 - $300,000). The income tax expense on the income statement is calculated as the sum of current tax expense (taxable income multiplied by the tax rate) and the change in the deferred tax balance during the year. Therefore, the income tax expense for 2015 is calculated as follows:

Current tax expense = $400,000 × 30% = $120,000
Change in deferred tax liability = $60,000 × 30% = $18,000
Total income tax expense = $120,000 + $18,000 = $138,000

Therefore, the entry to record income tax expense on December 31, 2015 would include a debit to Income Tax Expense for $138,000.

Shane Company Uses an Accelerated Depreciation Method for Income Tax