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    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!!
    a few seconds ago 1 Answer

    Best Answer

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    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.
    a few seconds ago

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