Question

in 2024, ryan management collected rent revenue for 2025 tenant occupancy. for financial reporting, the rent is recorded as deferred revenue and then recognized as revenue in the period tenants occupy rental property. for tax reporting, the rent is taxed when collected in 2024. the deferred portion of the rent collected in 2024 was $146.0 million. the tax rate is 25%. suppose the deferred portion of the rent collected was $64 million at the end of 2025. taxable income is $580 million. prepare the appropriate journal entry to record income taxes in 2025.

Answer 1

To record income taxes in 2025, the journal entry would be as follows: Debit: Income Tax Expense - Deferred ($64 million). Credit: Income Tax Payable - Current ($145 million).

Step-by-step explanation:

To record income taxes in 2025, the journal entry would be as follows:

Debit: Income Tax Expense - Deferred ($64 million)

Credit: Income Tax Payable - Current ($145 million)

The Income Tax Expense - Deferred account is debited to decrease the balance and recognize the expense in the current period. The Income Tax Payable - Current account is credited to reflect the current tax liability. The deferred portion of the rent collected in 2024 is being recognized as revenue in the period tenants occupy the rental property, and the tax is being accounted for in the year it was collected.

Answer 2

To record income taxes for 2025, Ryan Management must recognize $145 million as a tax expense and adjust its deferred tax liability by $20.5 million, which reflects the change in deferred rent from 2024 to 2025.

Step-by-step explanation:

For financial reporting purposes, Ryan Management has recorded rent collected for future occupancy as deferred revenue, in compliance with the matching principle of accounting. This rent is recognized as revenue when the occupancy occurs. For tax reporting, however, the rent is taxed when it is collected. The problem states that in 2024, $146.0 million was collected and recorded as deferred revenue, taxed at a rate of 25%. By the end of 2025, the deferred portion has decreased to $64 million. Taxable income for 2025 is given as $580 million. To record income taxes for 2025, we must adjust the deferred tax liability and recognize the income tax expense.

The journal entry would involve recognizing the current tax expense for the year and adjusting the deferred tax asset or liability. The calculation goes as follows:

• Current Tax Expense = Taxable Income * Tax Rate
• Current Tax Expense = $580 million * 25%
• Current Tax Expense = $145 million

Change in Deferred Revenue for Tax purposes = Deferred Revenue (start of year) - Deferred Revenue (end of year)

• Change in Deferred Revenue = $146.0 million - $64 million
• Change in Deferred Revenue = $82 million

Tax Effect of Deferred Revenue = Change in Deferred Revenue * Tax Rate

• Tax Effect = $82 million * 25%
• Tax Effect = $20.5 million

Then, the journal entry would be:

• Debit Income Tax Expense $145 million (for the current tax expense)
• Credit Deferred Tax Liability $20.5 million (for the change in the deferred tax liability)
• Credit Cash (or Taxes Payable) $124.5 million (for the cash taxes to be paid)

This entry recognizes the current income tax expense and adjusts the deferred tax liability on the balance sheet.