Question

In 2020, RST Corporation has $75,000 of income before taxes in its accounting records.   In computing income tax expense, RST makes the following observations of differences between the accounting records and the tax return:

1. An accelerated depreciation method is used for tax purposes. In 2020, RST reports $6,000 more depreciation expense for tax purposes than it shows in the accounting records.

2. In 2020, RST collected $60,000 from a business that is renting a portion of its warehouse. The $60,000 covers the rental payment for the four years 2021-2024, and therefore no rental revenue has been recognized for 2020. However, XYZ must pay taxes on the entire amount collected in 2020.

The enacted tax rate in 2020 is 21% and is 23% in 2021 and years following.

Required:

1.      Calculate taxable income for 2020.

2.      Prepare the journal entry necessary to record income taxes at the end of 2020.

3.      How would any deferred tax amounts be reported on a classified balance sheet?

4.     Assume that RST’s 2021 pretax accounting income is $9,000 and that RST reports $3,000 more depreciation expense for tax purposes than it shows in the accounting records. Also during 2021, RST invests in tax-free municipal bonds that earn $3,000 interest in 2021. Prepare the journal entry necessary to record income taxes at the end of 2021.

5. What is the amount of net income or loss that RST would report on its 2021 income statement and how will it be reported?

Answer 1

	Particulars	2020	Remarks	2021	Remarks
	Income before taxes	75,000		9,000
	Additional depreciation	-         6,000	Deferred tax liability	-    3,000	Deferred tax liability
	Rental revenue	60,000	Deferred tax asset	-
	Municipal bonds rev.- tax free			-    3,000	Permanent difference
	Taxable income	129,000		3,000
	Tax rate	21%		23%
	Tax charge	27,090		690
	Deferred tax asset/ (liability)	54,000		51,000	(-$ 3000+ (Rent$ 60000-6000)
	Tax rate	23%		23%
	Deferred tax (expense)/ credit	12,420		11,730
Date	Account titles and explanation	Debit	Credit		Income statement	2021
31/12/2020	Income tax expense	27,090			Income from Municipal bonds	3,000
	Deferred tax asset	12,420			Rental revenue ($60,000/4 years)	15,000
	$ 60,000-$ 6000* 23%				Total income	18,000
	Income tax payable		27,090		Less: Other expenses	-     9,000
	Deferred tax credit		12,420		Net income before taxes (Given)	9,000
31/12/2021	Income tax expense	690			Less: Income tax expense	690
	Deferred tax credit	690			Less: Deferred tax	690
	Income tax payable		690		Net income after taxes	7,620
	Deferred tax asset		690
	$ 12,420- $ 11730