Financial Accounting: In an Economic Context

ACCOUNTING ENTRIES FOR DEFERRED INCOME TAXES

Preparing the journal entry to record the recognition or discharge of deferred income taxes consists of three steps:

1. Compute the future income tax disbenefit ($900 = $300 + $600) as illustrated in Figure 10B-1. This dollar amount is entered as a credit to the deferred income tax account. The dollar amounts of the reversals (2010: $300, 2011: $600) are entered as debits to the deferred income tax account in future periods.
2. Compute the company's income tax liability (taxable income X corporate income tax rate). This dollar amount is entered as a credit to the income tax payable account.
3. Enter a debit to the income tax expense account in an amount that brings the journal entry into balance. Income tax expense is also equal to the net income before tax amount reported on the income statement multiplied times the company's effective income tax rate.

To illustrate, assume in the preceding example that Midland Plastics recognized taxable income in the amount of $4,000, $8,000, and $9,000 in 2009, 2010, and 2011, respectively.⁹ At a 30 percent tax rate, the company's tax liability, therefore, is $1,200 (2009), $2,400 (2010), and $2,700 (2011). Given this information, Figure 10B-2 contains the journal entries, and the balance sheet carrying values of the deferred income tax account for the three-year period.

FIGURE 10B-2 Deferred income taxes

In 2009, a deferred tax liability of $900 is recognized because Midland, which uses the DDB method ...