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Hi sir,
Can u pls explain me this question I really don’t understand ?
Peach Co is preparing its financial statements for the year ended 30 November 20X9. Peach Co estimates its income tax expense as $145,000 for the year.
The trial balance shows a debit balance on the tax account of $22,000. This represents the balance after the prior year’s tax liability was paid.
What is the income tax expense in the statement of profit or loss for the year ended 30 November 20X9?
Answer : 167,000
how to know that the prior year tax was underestimated from this question ?
Last year they will have credited the tax liability account (and debited the expense account) with the amount they had estimated as owing.
When they paid the tax owing (during the year) they will have debited the tax liability account (and credited cash).
To have ended up with a debit balance on the account, it must mean that the amount they ended up paying was more than the amount that they accrued at the end of last year – so the had underestimated last years tax.
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