Question

Year 1 is Company’s first year of business. Company rents part of its office building to earn extra revenue. In December of Year 1, Company received a prepayment of $10,000 for January, Year 2 rent. For income tax purposes, this $10,000 is year 1 revenue (subject to income tax in Year 1). However, for GAAP, this amount will be revenue in Year 2. No other temporary differences exist between GAAP and tax. Company has taxable income of $100,000 in Year 1 and a tax rate of 20% for all years. Company’s Year 1 income tax expense is:

a. 22,000

b. 18,000

c. 20,000

d. 10,000

Answer 1

Ans:

Income Tax Expense = Income Tax Payable - Deferred Tax Assets

Income Tax Payable:

Taxable Income : $100,000

Tax rate : 20%

Income Tax Payable : $100,000 * 20 % = $20,000

Deferred Tax Asset = Temporary Difference * Tax Rate

= $10,000 * 20% = $2,000

Income Tax Expense = $20,000 - $2,000 = $18,000

So correct answer is option B.

For any query please ask in comment box, we are happy to help you. Also please don't forget to provide your valuable feedback. Thanks!