Question

The following information is available for Wenger Corporation for 2016 (its first year of operations). 1. Excess of tax depreciation over book depreciation, \(40,000. This \)40,000 difference will reverse equally over the years 2017–2020. 2. Deferral, for book purposes, of \(20,000 of rent received in advance. The rent will be recognized in 2017. 3. Pretax financial income, \)300,000. 4. Tax rate for all years, 40%. Instructions (a) Compute taxable income for 2016. (b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2016. (c) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2017, assuming taxable income of $325,000.

Short answer

Rent received in advance is an item reported under the organization's profit and loss statement (credit side). A relevant journal entry is passed in the journal book of the company.

Step-by-step solution

(a) Computation of taxable income for the year 2016.

Particulars	Amount
Pretax financial income	$300,000
Less: Excess of depreciation	$40,000
Add: Rent received	$20,000
Taxable income	$280,000

Computation of tax liability

Temporary difference	Future taxable amount	Tax Rate	Deferred tax liability
Depreciation	$40,000	40%	$16,000
Unearned rent	($20,000)	40%
Total			$16,000

(b) Journal entry

Date	Particulars	Debit	Credit
2016	Income tax expense	$120,000
	Deferred tax asset	$8,000
	Income tax payable $\left(\$280,000\times 40\%\right)$		$112,000
	Deferred tax liability		$16,000
	(To record the income tax expense)

(c) Journal entry

Date	Particulars	Debit	Credit
2017	Income tax expense $\left(\$130,000-\$4,000+\$8,000\right)$	$134,000
	Deferred tax liability $\left(\$10,000\times 40\%\right)$	$4,000
	Income tax payable $\left(\$325,000\times 40\%\right)$		$130,000
	Deferred tax asset $\left(\$20,000\times 40\%\right)$		$8,000
	(To record the income tax expense)