In 2016, DFS Medical Supply collected rent revenue for 2017 tenant occupancy. Fo

Question

In 2016, DFS Medical Supply collected rent revenue for 2017 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 income in the period tenants occupy the rental property. The deferred portion of the rent collected in 2016 amounted to $360,000 at December 31, 2016. DFS had no temporary differences at the beginning of the year. Required: Assume an income tax rate of 40% and 2016 income tax payable of $910,000, prepare the journal entry to record income taxes for 2016. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Explanation / Answer

The amount of $360,000 will be treated as a temporary difference resulting in deferred tax asset. It will be considered for tax purposes in the Year 2016 and for book purposes in the future reporting periods. It would mean that the pre-tax accounting income would be lesser by $360,000.

We have been provided with the amount of income tax payable. Using the figure for income tax payable and tax rate, we get the pre-tax accounting income of $2,275,000 (910,000/40%). Since, $360,000 has not been earned, the amount of $360,000 will be deducted from this pre-tax accounting income to determine the accounting income to be used for calculating income tax expense to be reported in books. This amount will be $1,915,000 (2,275,000 - 360,000).

The journal entry is given below:

Account Titles Debit Credit Income Tax Expense (1,915,000*40%) $766,000 Deferred Tax Asset (360,000*40%) $144,000 Income Tax Payable $910,000

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