Question

Accounting journal entries for estimated income tax payable, actual tax and penalty on underestimate tax?

Company ABC has paid 12-month tax instalment (estimated tax payable) totalling $180000. However the actual tax payable is $340000. Gov Tax Dept required a 10% penalty to impose on the excess of 30% difference between estimated and actual tax payable. Therefore the calculation of the penalty for underestimation will be as follows:-

Actual tax payable 340000
Less: (180000)
Shortfall 160000
Less: Margin of Error (30% x $340k) (102000)
Excess over $102000 58000
Penalty (10% x $58000) 5800

The Company has tax credit/refund brought forward from previous year amounting to $10000. So the Company should only pay $150000 additional income tax plus penalty on underestimation of $5800.

Now let's proceed to accounting journal entries to record such transactions. I understand that accounting journal entry to record the payment of monthly tax instalment is (pls correct me if I am wrong):

DR. Provision of Income Tax (Current Asset - Prepayment)
CR. Cash

But what is the journal entries to record the actual income tax payable, the tax credit/refund and the penalty ? Pls help!!
I would prefer answers showing DR and CR. Thanks much.

3 years ago - 1 answers

Best Answer

Chosen by Asker

I don't know where you're from, but assuming your entry above is correct, you'd have a debit balance of $180,000 in your Prov for Income Tax (Current Asset - Prepayment) account. So let's start from there. If the correct tax amount is $340,000 and there is a tax credit/refund brought forward from previous year amounting to $10000, then what the expense account should show is $330,000. Assuming the penalty is taken to a Fines and penalties account (or any other name you deem fit), the entries would look like this:

Dr Income tax expense $330,000
Dr Fines and penalties $5,800
Cr Provision for Income Tax $330,000
Cr Penalties payable $5,800

After putting through the above, you'd have an Income tax expense account with a balance of $330,000 (debit); and a Provision for Income Tax account $150,000 (credit).

I've also assumed that your tax credit/refund brought forward from previous year amounting to $10000 is not recorded in the books.

3 years ago