Question

At the end of its first year of business, Fred Company reported $120,000 of unearned subscription revenues. This unearned revenue was Fred’s only temporary difference. In its second year of business, Fred reported pretax financial income of $200,000. At the end of Fred’s second year, the unearned subscription revenues account decreased to $90,000 and Fred estimates it will reverse in year 3. The enacted tax rate for every year is 20%. Prepare the journal entry to record Fred’s income tax expense, deferred taxes, and income taxes payable for its second year.

Answer 1

Solution:

Taxable income for Fred in second year = Pretax financial income - Decrease in unearned subscription revenue

= $200,000 - ($120,000 - $90,000)

= $170,000

Journal Entries - Fred Company
Date	Particulars	Debit	Credit
Year 2	Income tax expense Dr	$40,000.00
	To Income taxes payable ($170,000*20%)		$34,000.00
	To Deferred tax Assets ($30,000*20%)		$6,000.00
	(To record income tax expense for the year)