Question

The DeVille Company reported pretax accounting income on its income statement as follows:

2021	$	450,000
2022		370,000
2023		440,000
2024		480,000

Included in the income of 2021 was an installment sale of property in the amount of $70,000. However, for tax purposes, DeVille reported the income in the year cash was collected. Cash collected on the installment sale was $28,000 in 2022, $35,000 in 2023, and $7,000 in 2024.

Included in the 2023 income was $30,000 interest from investments in municipal governmental bonds.

The enacted tax rate for 2021 and 2022 was 40%, but during 2022, new tax legislation was passed reducing the tax rate to 25% for the years 2023 and beyond.

Required:
Prepare the year-end journal entries to record income taxes for the years 2021–2024. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Solution:

Computation of Taxable Income and Income Tax Payable
Particulars	2021	2022	2023	2024
Pretax accounting income	$450,000.00	$370,000.00	$440,000.00	$480,000.00
Less: Income from installment sale property	-$70,000.00	$0.00	$0.00	$0.00
Add: Collection of installment sales	$0.00	$28,000.00	$35,000.00	$7,000.00
Less: Interest on municipal bonds	$0.00	$0.00	-$30,000.00	$0.00
Taxable Income	$380,000.00	$398,000.00	$445,000.00	$487,000.00
Income Tax Payable	$152,000.00	$159,200.00	$111,250.00	$121,750.00

Computation of Deferred Tax
Particulars	2021	2022	2023	2024
Collection of installment sale as per tax return	$0.00	$28,000.00	$35,000.00	$7,000.00
Income from installment sales as per books	$70,000.00	$0.00	$0.00	$0.00
Taxable Temporary differences	$70,000.00	$0.00	$0.00	$0.00
Reversible Temporary differences		-$28,000.00	-$35,000.00	-$7,000.00
Deferred tax liability	$28,000.00
Reversal of Deferred tax liability 2022 = ($28,000*40% + $42,000*15%) 2023 - $35,000*25% 2024 - $7,000*25%		$17,500.00	$8,750.00	$1,750.00

Journal Entries - Deville Company
Year	Particulars	Debit	Credit
2021	Income Tax Expense Dr	$180,000.00
	To Income tax Payable		$152,000.00
	To Deferred tax liability		$28,000.00
	(To record income tax and deferred tax for 2021)
2022	Income Tax Expense Dr	$141,700.00
	Deferred tax liability Dr	$17,500.00
	To Income tax Payable		$159,200.00
	(To record income tax and deferred tax for 2022)
2023	Income Tax Expense Dr	$102,500.00
	Deferred tax liability Dr	$8,750.00
	To Income tax Payable		$111,250.00
	(To record income tax and deferred tax for 2023)
2024	Income Tax Expense Dr	$120,000.00
	Deferred tax liability Dr	$1,750.00
	To Income tax Payable		$121,750.00
	(To record income tax and deferred tax for 2024)