Wittco Company reports pretax GAAP income in 2020, its first year of operations, of $180,000. Temporary differences in the GAAP basis and tax basis of assets arose in 2020 from the following two sources. Prepayment of 2021 rent in the amount of $43,200 in 2020. An installment sale totaling $64,800, with cash collections expected in two equal amounts in 2022 and 2023. The enacted tax rates are 25% in 2020, 30% in 2021, and 40% in 2022 and thereafter. The enacted tax rates are 25% in 2020, 30% in 2021, and 40% in 2022 and thereafter. Required a. Record the income tax journal entry on December 31, 2020. b. Record the income tax journal entry on December 31, 2020, assuming that a new tax law is passed in 2020 decreasing the tax rate to 20% for 2020 and all years thereafter

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Deferred Tax

Deferred tax is an estimated future tax which is made while preparing accounts. It is estimated as a result of past and present transactions in the financial statements. It is not the actual tax which needs to be paid or refundable from the revenue authority, it is an accounting entry. It exists because of the difference between accounting profits and taxable profits.