Question

In 2021, Ryan Management collected rent revenue for 2022 tenant occupancy. For financial reporting, the rent is recorded as deferred revenue and then recognized as revenue in the period tenants occupy rental property. For tax reporting, the rent is taxed when collected in 2021. The deferred portion of the rent collected in 2021 was $106 million. Taxable income is $460 million in 2021. No temporary differences existed at the beginning of the year, and the tax rate is 25%. Prepare the appropriate journal entry to record income taxes in 2021. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in millions rounded to 1 decimal place (.e., 5,500,000 should be entered as 5.5).) View transaction list View journal entry worksheet No Transaction General Journal Debit Credit Income tax expense Deferred tax asset Income taxes payable

Answer 1

Deferred tax asset is recognized when the taxable income (hence tax paid) in the current period is higher than the taxable income according to accrual or financial statement basis. For example in this case the taxable income of $460 million includes the rental income for 2022 which has not yet been accrued. But for tax reporting we are paying tax for this deferred income, so the extra tax we pay is an asset for the company and can be carried forward to 2022.

Income Tax Expense = ($460 -$106) x 25% = $88.5 million

Deferred Tax asset = $106 x 25% = $26.5 million

Below is the journal entry to be passed:

Income Tax Expense $88.5

Deferred Tax asset $26.5

To Income Taxes Payable $115