Question

Company C set up a Reserve for Bad Debts in 2013. Although there were no account balances written off, it was considered prudent to acknowledge that some of the Accounts Receivable would not be collectable. The IRS does not allow a deduction until the accounts are written off. As a result, the Taxable Income was greater than the Income Before Taxes.

This is a timing difference and will reverse in future years so it means that Taxable Income will be less than Income Before Taxes in some future years when the accounts written off will be greater than the increase in the Reserve for Bad Debts. What will be the entry required in 2013 to record this difference?

Answer 1

Answer:

Company C

Journal Entry to record the Difference in Taxable Income and Income before Taxes in 2013:

Debit Deferred Tax Asset $

Credit Income Tax Payable $

To record the deferred tax asset.

Explanation:

Since the taxable income is higher than the Income before Taxes, there is a deferred tax asset.

The amount is the tax rate multiplied by the difference in the two incomes.

A deferred tax asset  results from overpayment or advance payment of taxes due to timing differences.  It is the opposite of a deferred tax liability, which represents income taxes owed or underpayment of taxes as a result of the timing of transactions.

Timing differences arise from the treatment of Taxable Income by the tax authorities and the different treatment of Income before Taxes recognized in GAAP accounting.