Question

In 2021, DFS Medical Supply collected rent revenue for 2022 tenant occupancy. For income tax reporting, the rent is taxed when collected. For financial statement reporting, the rent is recorded as deferred revenue and then recognized as revenue in the period tenants occupy the rental property. The deferred portion of the rent collected in 2021 amounted to $440,000 at December 31, 2021. DFS had no temporary differences at the beginning of the year.
Required:
Assuming an Income tax rate of 25% and 2021 Income tax payable of $960,000, prepare the journal entry to record Income taxes for 2021.

Answer 1

Answer:

Debit Income tax expenses for $850,000; Debit Deferred Tax asset for $110,000; and Credit Income tax payable for $960,000.

Explanation:

Before the journal entry is prepared, the following are first calculated:

a. Deferred tax assets = Deferred portion of the rent collected in 2021 * Tax rate = $440,000 * 25% = $110,000

b. Income tax expense = 2021 Income tax payable - Deferred portion of the rent collected in 2021 = $960,000 - $110,000 = $850,000

The journal entry to record Income taxes for 2021 will look as follows:

Date                  General Journal                      Debit ($)        Credit ($)  

31 Dec 2021      Income tax expenses            850,000  

                          Deferred Tax asset                 110,000

                              Income tax payable                                   960000

                          (To record income tax expenses.)