Question

In 2013, DFS Medical Supply collected rent revenue for 2014 tenant occupancy. For income tax reporting, the rent is taxed when collected. For financial statement reporting, the rent is recognized as income in the period earned. The unearned portion of the rent collected in 2013 amounted to $300,000 at December 31, 2013. DFS had no temporary differences at the beginning of the year. Required: Assuming an income tax rate of 40% and 2013 income tax payable of $950,000, prepare the journal entry to record income taxes for 2013.

Option 1: Income Tax Expense
Option 2: Rent Revenue Recognition
Option 3: Unearned Rent Adjustment
Option 4: Tax Payable Journal Entry

Answer 1

DFS Medical Supply must adjust its income taxes to account for unearned rent revenue, resulting in a deferred tax liability. The journal entries include debiting Income Tax Expense and crediting Income Tax Payable and Deferred Tax Liability.

Step-by-step explanation:

In the scenario provided, DFS Medical Supply collected rent revenue in 2013 for tenant occupancy in 2014. Since this rent revenue is taxed when collected but recognized for financial reporting when it is earned, an adjustment must be made for the unearned portion of the rent ($300,000) for income tax purposes. The income tax rate is 40%, and the income tax payable for 2013 is $950,000. The unearned rent would lead to a deferred tax liability because it will be taxed later when it is actually earned.

To record the income taxes for DFS Medical Supply, two entries are necessary. First, we need to recognize the tax expense for the year, and second, we have to adjust for the deferred taxes due to the unearned rent revenue.

Journal Entries:

The complete journal entry to adjust for the income taxes would therefore be:
this entry accounts for the taxes paid and the taxes that will be recognized in the future when the rent revenue is earned.