Question

Which of the options below would cause the following journal entry to be made?

Debit income tax expense for 500k
Credit cash for 550k
Debit deferred income tax asset for 50k

Answer 1

The journal entry represents a payment for income tax obligations higher than the income tax expense, with the difference recognized as a deferred tax asset, indicating prepaid taxes that will be recovered in the future.

Step-by-step explanation:

The journal entry in question involves a debit to income tax expense for 500k, a credit to cash for 550k, and a debit to deferred income tax asset for 50k. This entry could be caused by the company making a payment for its income tax obligation where the actual tax payment (cash) is higher than the income tax expense recognized in the income statement. The additional $50,000 paid is recognized as a deferred income tax asset, suggesting that the company has prepaid a portion of its future taxes, which may occur due to differences between accounting and tax regulations. This deferred tax asset indicates that the company expects to recover this amount in future periods when its income tax expense is greater than the cash paid for taxes.

This journal entry indicates that the income tax expense of $500k is being debited, which means it is being recorded as an expense on the income statement. The cash account is being credited for 550k, which means cash is being paid for taxes owed. Lastly, the deferred income tax asset account is being debited for $50,000, which means a portion of the income tax expense is being deferred to future periods.