Shear, Inc. began operations in Year 1. Included in Shear’s Year 1 financial statements were bad debt expenses of $1,400 and profit from an installment sale of $2,600. For tax purposes, the bad debts will be deducted and the profit from the installment sale will be recognized in Year 3. The enacted tax rates are 30% in Year 1 and 25% in Year 3. In its Year 1 income statement, what amount should Shear report as deferred income tax expense?
a. $300
b. $360
c. $780
d. $650

A deferred income tax liability is a liability reported on a balance sheet as a result of an income recognition difference between tax regulations and the company's accounting processes. As a result, the company's paying income tax may differ from the total tax expense stated.

How do we calculate deferred income tax?

Deferred tax derives from the distinction between taxable and accounting profits. Companies claim tax depreciation known as capital allowances when calculating taxable profits, whereas accounting profits subtract accounting depreciation.

According to the given question,

Deferred tax liability = [$2,600 × .25] = $650

To observe the deferred tax asset related to the bad debt expense, the following entry is required:

Deferred tax expense = [$1,400 × .25] = $350

The amount of deferred tax expense reported by Shear in its year 1 income statement is $300 = ($650 − $350).

The amount Shear report as deferred income tax expense is $300.

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