Question

Magruder Company reports pretax accounting income of $5,000,000 for 2019. The 2019 income tax rate is 20%. INCLUDED in accounting income is depreciation expense of $500,000 which was calculated using the straight line method. Magruder’s tax manager indicates that depreciation expense per the tax return will be $2,000,000 because the tax laws allow more accelerated depreciation. Magruder’s pretax accounting income does NOT include $1,000,000 of prepaid rent that a tenant paid to the company in 2019 because the prepayment represents rent due for 2020. The accountant properly recorded this amount as a liability on the balance sheet (Unearned Rent). The tax manager advises that the $1,000,000 must be INCLUDED in taxable income for 2019. Required: 1. Calculate taxable income income and income tax payable for 2019. 2. Prepare the adjusting entry to record income tax expense, deferred income taxes, and income tax payable.

Answer 1

Answer :

(1).

Magruder Company

Accounting inocme	-	$5,000,000
Adjustment for depreciation	-	-
Book depreciation	$500,000	-
Depreciation as per taxation	$(2,000,000)	$(1,500,000)
Less : Temporary difference arising for depreciation (2000000 - 500000)	-	-
Adjustment for unearned rent	-	-
Add : Temporary diff arising from unearned rent taxable in this year	$1,000,000	$1,000,000
Taxable income (5000000 - 1500000 + 1000000)	-	4,500,000
Income tax rate	-	20%
Income tax payable (4500000*20/100)	-	$900,000

(2) Journal Entries

Account Title and Explanation	Debit	Credit
Income Tax Expense	$1,000,000	-
Deferred Tax Assets	$200,000	-
To Deferred Tax Liability	-	$300,000
To Tax payable	-	$900,000
(To Record tax expense and tax payable)	-	-

Working Notes :

Income tax expense is calculated as below

Accounting income	$5,000,000.00
Tax Rate	20%
Income tax expense (5000000*20)/100	$1,000,000.00

Deferred tax assets is calculated as below

Income taxable this year but not included in accounting income (Unearned Rent)	$1,000,000.00
Tax Rate	20%
Deferred tax assets (1000000*20)/100	$200,000.00

Deferred tax liability is calculated as below

Income not taxable this year but included in accounting income (Depreciation)	$1,500,000.00
Tax Rate	20%
Deferred tax liability (1500000*20)/100	$300,000.00