Question

In 2018, North Company rented a villa for three years and received a total of $60,000. The rent is earned equally over the period 2018-2020. For tax purposes, North should report the full $60,000 on 2018 tax return form. By year end, the company reported an income tax expense of $22,000 and income tax payable of $37,000.
In 2019, the company terminated a maintenance contract and agreed to pay $10,000 per year for 2019-2021. The total termination amount is fully deducted for financial reporting purposes and deducted as paid for tax purposes. The pretax financial income for 2019 is $90,000. The tax rates are 30% for 2018 and 35% for 2019. By end of 2019, the government announced the change of tax rate for future periods.
a. Prepare the journal entry to record income taxes for 2019.

b. Which approach have you applied in answering part (a)? what are the main objectives of this approach?

Answer 1

a)
Taxable Income & Tax Expenses	$
Pretax Income for 2019	90,000
Less: allowanble deduction	-30,000
(10000*3)
Less: Rent income as included in 90k	-20,000
Taxable Income	40,000
Tax @ 35%	14,000
Journal Entry for 2019	$	$
Income Tax Expenses A/c…............Dr	14,000
To Income Tax Payable A/c		14,000
(Being income tax expenses provided)
b) Basically Timming difference Approach is used in determination of taxable value and tax liability.
Same approach has been applied. As in this case income tax on rent was already paid in 2018 but
financial income for 2019 is included the same income so applying the timming difference approach
taxable value determined after reducing rent income which was already taxed in earlier year. Timming
difference approach is comes due to different methodology as used to determine profitibility. Where
Accounting approach is based on accrual system, taxation rule is based on cash system for many adjustment.
I have ignored diferred tax approach for above calculation.