Question

Alsup Consulting sometimes performs services for which it receives payment at the conclusion of the engagement, up to six months after services commence. Alsup recognizes service revenue for financial reporting purposes when the services are performed. For tax purposes, revenue is reported when fees are collected. Service revenue, collections, and pretax accounting income for 2017–2020 are as follows:

service revenue collections pre tax accounting income

2017	$	688,000		$	653,000		$	220,000
2018		780,000			795,000			285,000
2019		745,000			715,000			255,000
2020		730,000			760,000			235,000

There are no differences between accounting income and taxable income other than the temporary difference described above. The enacted tax rate for each year is 40%.

(Hint: You may find it helpful to prepare a schedule that shows the balances in service revenue receivable at December 31, 2017–2020.) Required: 1. Prepare the appropriate journal entry to record Alsup's 2018 income taxes, Alsup’s 2019 income taxes and Alsup’s 2020 income taxes.

Answer 1

Solution 1:

Computation of Taxable Income and Tax Payable - Alsup Consulting
Particulars	2018	2019	2020
Pre tax accounting income	$285,000.00	$255,000.00	$235,000.00
Add: Service revenue collection	$795,000.00	$715,000.00	$760,000.00
Less: service revenue as per books	$780,000.00	$745,000.00	$730,000.00
Taxable income	$300,000.00	$225,000.00	$265,000.00
Income Tax (40%)	$120,000.00	$90,000.00	$106,000.00

Computation of Temporary differences - Alsup Consulting
Particulars	2017	2018	2019	2020
Beginning service revenue receivables	$0.00	$35,000.00	$20,000.00	$50,000.00
Service Revenue	$688,000.00	$780,000.00	$745,000.00	$730,000.00
Collection	$653,000.00	$795,000.00	$715,000.00	$760,000.00
ending service revenue receivables	$35,000.00	$20,000.00	$50,000.00	$20,000.00
Taxable (Deductible Temporary differences)	$35,000.00	-$15,000.00	$30,000.00	-$30,000.00
Deferred tax liability (reversal) for the year	$14,000.00	-$6,000.00	$12,000.00	-$12,000.00

Journal Entries - Alsup Consulting
Date	Particulars	Debit (In '000)	Credit (In '000)
31-Dec-18	Income tax expense Dr	$114.00
	Deferred tax liability Dr	$6.00
	To Income tax payable		$120.00
	(To record income tax and deferred taxes)
31-Dec-19	Income tax expense Dr	$102.00
	To Income tax payable		$90.00
	To Deferred tax liability		$12.00
	(To record income tax and deferred taxes)
31-Dec-20	Income tax expense Dr	$94.00
	Deferred tax liability Dr	$12.00
	To Income tax payable		$106.00
	(To record income tax and deferred taxes)