1. Pane records income tax expense using a current and expected future income tax rate of 30%. The following book-tax differences exist at year-end:
2. 1. The $1,000,000 accrued loss related to fines and penalties owed to the state of Florida (see Transaction #17) will never be deductible for tax purposes and is treated as a “Permanent Difference” under GAAP.
3. 2. The book basis of the investment in equity securities (see Transaction #10 and #30) equals the investment’s fair value of $556,000. The tax basis of the investment in equity securities equals the investment’s historical cost of $440,000. This difference is treated as a “Temporary Difference” under GAAP and the $116,000 holding gain is excluded from taxable income.
4. 3. A net operating loss (NOL) carryforward of $5,000,000 (along with a deferred tax asset of $1,500,000) existed at the beginning of the year. The NOL carryforward was used during the current year.

Assume no other book-tax differences exist. Furthermore, assume there were no book-tax differences in the prior year other than the one created by the NOL carryforward. Ignore estimated tax payment requirements. Note that all deferred tax assets and liabilities are reported as noncurrent on the balance sheet Pre-tax book income equals $27,342,592. Taxable income (per the tax return) equals $23,22

Answer #1 with a journal entry of:

dr. income tax expense

cr. income tax payable

cr. deferred tax liability

cr. deferred tax assets