Question

Alvis Corporation reports pretax accounting income of $400,000, but due to a single temporary difference, taxable income is only $250,000. At the beginning of the year, no temporary differences existed. Required: 1. Assuming a tax rate of 35%, what will be Alvis’s net income? 2. What will Alvis report in the balance sheet pertaining to income taxes?

Answer 1

Answer:  1. $260,000

2. $52,500 and  $87,500

Explanation:

1. It can be computed as follows :-

Net income = Accounting income before tax - Income tax expense

                    = $ 400,000 - ($400,000) * (35%)

                    = $260,000

2. As per balance sheet :-

Deferred tax liability = ( $400,000 - $250,000) * (35%) = $52,500

Income tax liability = ($250,000) * (35%) = $87,500