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 $350,000 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 $900,000, prepare the journal entry to record income taxes for 2021. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Deferred Tax Asset:

The amount of taxes that is paid or carried forward but not yet identified in the income statement is referred as deferred tax asset

Journal Entries:

Debit: Income Tax Expense (balancing amount) = 812,500

Debit: Deferred Tax Asset = 87,500

Credit: Income Tax Payable = 900,000

• Income tax expense reduces the stockholders. equity. Hence, debit income tax expense with $812,500 .
• Deferred tax asset is an asset and is increased by $87,500. Therefore, debit deferred tax asset account with $87,500.
• Income tax payable increases the liability by $900,000. Therefore, credit Income tax payable account with $900.000.

Working note:

Determine the amount of deferred tax asset.

Deferred tax asset = Rent collected in 2021 × Enacted tax rate

Deferred tax asset = $350,000 × 25%

Deferred tax asset = $87,500

Determine the amount of income tax expense.

Income tax expense = Income tax payable — Deferred tax asset

Income tax expense = $900,000 = $87,500

Income tax expense = $812,500