Q1 Zach Company reports pretax financial income of $70,000 for 2020.
The following items cause taxable income to be different than pretax financial income.
1. Depreciation on the tax return is greater than depreciation on the income statement by $16,000.
2. Rent revenue collected on the tax return is greater than rent recognized on the income statement by $22,000.
Zach's tax rate is 30% for all years, and the company expects to report taxable income in all future years.
There are no deferred taxes at the beginning of 2020.
Required:
a. Identify the relevant classification for each temporary tax difference (i.e., 1,2,3 or4), provide the analysis to identify whether each difference is a DTA or DTL.
b. Reconcile pretax financial income to taxable income.
c. Prepare the schedule to identify the changes in DTA and/or DTL and the appropriate journal entry to record income tax expense, deferred income taxes and income taxes payable.