Use the following information for questions 73 and 74.
Kraft Company made the following journal entry in late 2014 for rent on property it leases to Danford Corporation. The payment represents rent for the years 2015 and 2016, the period covered by the lease. Kraft Company is a cash basis taxpayer. Kraft has income tax payable of $184,000 at the end of 2014, and its tax rate is 35%.
-What amount of income tax expense should Kraft Company report at the end of 2014?

Question

Use the following information for questions 73 and 74.
Kraft Company made the following journal entry in late 2014 for rent on property it leases to Danford Corporation.  The payment represents rent for the years 2015 and 2016, the period covered by the lease. Kraft Company is a cash basis taxpayer. Kraft has income tax payable of $184,000 at the end of 2014, and its tax rate is 35%.
-What amount of income tax expense should Kraft Company report at the end of 2014?

Quizplus · Accepted Answer

Kraft Company is a cash basis taxpayer, so the rent payment represents an expense only in the year it was paid. The entire amount of rent paid, which is for two years, should be recognized as an expense in 2015 when it is paid. Therefore, there is no tax expense related to the rent payment in 2014. The income tax expense in 2014 is based on the taxable income earned in that year, which is $184,000 / 0.35 = $526,857.14. However, only $184,000 is currently payable at the end of 2014, so the remaining $342,857.14 is a deferred tax liability. Therefore, the income tax expense for 2014 is $184,000.

Use the Following Information for Questions 73 and 74