Question

The following items caused the only differences between pretax financial income and taxable income.

1. In 2021, the company collected $369,000 of rent; of this amount, $123,000 was earned in 2021; the other $246,000 will be earned equally over the 2022–2023 period. The full $369,000 was included in taxable income in 2021.
2. The company pays $10,300 a year for life insurance on officers.
3. In 2022, the company terminated a top executive and agreed to $99,000 of severance pay. The amount will be paid $33,000 per year for 2022-2024. The 2022 payment was made. The $99,000 was expensed in 2022. For tax purposes, the severance pay is deductible as it is paid.

The enacted tax rates existing at December 31, 2021 are: 2021 20% 2023 30% 2022 25% 2024 30%Instructions (a) Determine taxable income for 2021 and 2022. (b) Determine the deferred income taxes at the end of 2021, and prepare the journal entry to record income taxes for 2021.

Answer 1

In 2021, the following entries will be added to the firms pre-tax income as they are deemed taxable in that year:

Rentals received in advance $369,000

The following will be deductible however;

Life insurance for officers $10,300

2021 closes with a net addition to pre-tax income of $358,700.

Tax rate x additional taxable income = deferred tax liability

= 20% x $358,700 = $71,740

In 2022, the following entries will be deducted from the firms pre-tax income as they are considered deductibles in that year:

*Rentals recognized in the year (full tax was paid in 2021 when it was received in advance) -$123,000

*Life insurance for officers $10,300

Additions to the pre-tax income will be:

severance pay: the only value recognized for tax is the amount paid. Thus, $66,000 will be added back to pretax income.

2022 closes with a net deduction to pre-tax income of -$67,300.

Tax rate x net deductible to taxable income = deferred tax Asset

= 25% x -$67,300 = $16,825

In 2023, the following entries will be deducted from the firms pre-tax income as they are considered deductibles in that year:

*Rentals recognized in the year (full tax was paid in 2021 when it was received in advance) -$123,000

*Life insurance for officers $10,300

* severance pay of $33,000 paid in the year

2023 closes with a net deduction to pre-tax income of -$166,300.

Tax rate x net deductions from taxable income = tax asset

= 30% x -$166,300 = $49,890

In 2024, the following entries will be deducted from the firms pre-tax income as they are considered deductibles in that year:

*Life insurance for officers $10,300

* severance pay of $33,000 paid in the year

2023 closes with a net deduction to pre-tax income of -$43,300

Tax rate x net deductions from taxable income = tax asset

= 30% x -$43,300 = $12,990

B.

Deferred Income tax (2021)

20% of the temporary difference ($358,700)

= $71,740

C.

Journal entries

Debit income taxes account $71,740

Credit Deferred tax liability account with $71,740