In: Finance
Tru Developers, Inc., sells plots of land for industrial
development. Tru recognizes income for financial reporting purposes
in the year it sells the plots. For some of the plots sold this
year, Tru took the position that it could recognize the income for
tax purposes when the installments are collected. Income that Tru
recognized for financial reporting purposes in 2018 for plots in
this category was $70 million. The company expected to collect 60%
of each sale in 2019 and 40% in 2020. This amount over the next two
years is as follows:
2019 | $ | 42 | million |
2020 | 28 | million | |
$ | 70 | million | |
Tru’s pretax accounting income for 2018 was $100 million. In its
income statement, Tru reported interest income of $15 million,
unrelated to the land sales, for which the company’s position is
that the interest is not taxable. Accordingly, the interest was not
reported on the tax return. There are no differences between
accounting income and taxable income other than those described
above. The enacted tax rate is 40 percent.
Management believes the tax position taken on the land sales has a
greater than 50% chance of being upheld based on its technical
merits, but the position taken on the interest has a less than 50%
chance of being upheld. It is further believed that the following
likelihood percentages apply to the tax treatment of the land sales
($ in millions):
Amount Qualifying for Installment Sales Treatment |
Percentage Likelihood of Tax Treatment Being Sustained |
||||
$ | 70 | 20 | % | ||
60 | 20 | % | |||
50 | 20 | % | |||
40 | 20 | % | |||
30 | 20 | % | |||
Required:
1. What portion of the tax benefit of tax-free
interest will Tru recognize on its 2018 tax return?
2. What portion of the tax benefit of tax-free
interest will Tru recognize on its 2018 financial statements?
3-a. What portion of the tax on the $70 million
income from the plots sold on an installment basis will Tru defer
on its 2018 tax return?
3-b. What portion of the tax on the $70 million
income from the plots sold on an installment basis will Tru defer
in its 2018 financial statements?
4. Prepare the journal entry to record income
taxes in 2018 assuming full recognition of the tax benefits in the
financial statements of both differences between pretax accounting
income and taxable income.
5. Prepare the journal entry to record income
taxes in 2018 assuming the recognition of the tax benefits in the
financial statements you indicated in requirements 1-3.