Four independent situations are described below. Each involves future deductible amounts and/or future taxable amounts produced by temporary differences:

($ in thousands)
Situation
1 2 3 4
Taxable income $85 $215 $195 $260
Future deductible amounts 15 20 20
Future taxable amounts 15 15 30
Balance(s) at beginning of the year:
Deferred tax asset 2 9 4
Deferred tax liability 2 2

The enacted tax rate is 40%.

Required:

For each situation, determine the following:

a. Income tax payable currently.
b. Deferred tax asset—balance.
c. Deferred tax asset—change (dr) cr.
d. Deferred tax liability—balance.
e. Deferred tax liability—change (dr) cr.
f. Income tax expense.

                                                                   1               2            3             4

a) Income tax payable                          $34,000  $86,000 $78,000 $104,000

b) Deferred tax Asset                           $10000                     $17000   $12000

c) Deferred tax asset Change               $6000                     $8000     $8000

d) Deferred tax liability                                         $8000       $8000     $12000

e) Deferred tax liability change                             $6000     $6000     $12000

f) Income tax expense                      $28000    $92000   $76000    $108000

Explanation:

Income tax payable = Taxable income * tax rate

Deferred tax asset = future deductible amounts *0.4 + opening balance

future deductible amount could be prepaid expense which is an asset

Deferred tax change = closing balance - opening balance

deferred tax liability = future taxable income * 0.4

Income tax expense = current tax payable + deffered tax ( liability)

                                          OR

                                   = current tax payable - deferred tax asset

to compute the deferred tax to be added to or subtracted from the current tax payable, we need the deferred tax change and if it is a asset we subtract it from current tax payable and if it is a liability we add it