Question

Roadhouse Inc. releases its financial statements in April each year. For the year ended December 31, 2022, Roadhouse had pretax accounting income of $405 million. Roadhouse also had taxable income of $427.5 million. This difference between pretax accounting income and taxable income was due to a $22.5 million dollar temporary difference which was received in December 2022 and related to unearned rent revenue that would be recognized in the following year (2023). The tax rate for 2022 is 30%.

What are the journal entries to record Roadhouse Inc. income taxes for 2022?

Now, suppose in March, after Roadhouse Inc. has recorded their financial statements, but before they have been released in April, a law is signed that will lower the tax rate to 25% for 2023. Please record (if necessary, if not say why), the entry for 2022 with this new change in tax rate.

Answer 1

Year 2022

Entry 1 - To recognise provision for tax payable on $427.5 million @ 30%.

Profit & Loss A/C DR $128.25 million

To Provision for Income Tax A/C $128.25 million

(Being provision made for tax payable for current year)

Entry 2 - The difference of $22.5 million between pretax accounting income and taxable income is a temporary difference and will result in Deferred Tax asset for the amount of 30% on $22.5 million.

Deferred Tax Asset A/C DR $6.75 million

To Profit & Loss A/C   $6.75 million

(Being Deferred Tax asset created on account of timing difference)

If in March a law is signed that will lower the tax rate to 25% for 2023, Road house Inc. will not recognise the effect of change in tax rate for the period ended on December 31, 2022 because this tax rate (@25%) was not substantially enacted on the reporting date. However, if the effect of this change is material, then Roadhouse Inc. should disclose the difference in its financial statements as on December 31, 2022. The entry for the effect of change in tax rate shall be recognised in the year 2023.