Question

In: Accounting

Alsup Consulting sometimes preforms services for which it receives payment at the conclusion the engagement, up...

Alsup Consulting sometimes preforms services for which it receives payment at the conclusion the engagement, up to six months after service 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 2020-2023 are as follows:

Service Revenue

Collections

Pretax Accounting

2020

$660,000

$620,000

$186,000

2021

$750,000

$778,000

$260,000

2022

$710,000

$702,000

$228,000

2023

$716,000

$720,000

$200,000

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 25%

Required:

  1. Prepare the appropriate journal entry to record Alsup’s 2021 income taxes
  2. Prepare the appropriate journal entry to record Alsups 2022 income taxes
  3. Prepare the appropriate journal entry to record Alsups 2023 income taxes

(HINT: You will find it helpful to prepare a schedule that shoes the balances in service revenue receivable at December 31, 2020 – 2023)

Solutions

Expert Solution

SOLUTION:

Computation of Taxable Income and Tax Payable - Alsup Consulting

Particulars 2021 2022 2023
Pre tax accounting income $2,60,000.00 $2,28,000.00 $2,00,000.00
Add: Service revenue collection $7,78,000.00 $7,02,000.00 $7,20,000.00
Less: service revenue as per books $7,50,000.00 $7,10,000.00 $7,16,000.00
Taxable income $2,88,000.00 $2,20,000.00 $2,04,000.00
Income Tax (25%) $72,000.00 $55,000.00 $51,000.00

Computation of Temporary differences - Alsup Consulting

2020 2021 2022 2023
Beginning service revenue receivables $0.00 $40,000.00 $12,000.00 $20,000.00
Service Revenue $6,60,000.00 $7,50,000.00 $7,10,000.00 $7,16,000.00
Collection $6,20,000.00 $7,78,000.00 $7,02,000.00 $7,20,000.00
ending service revenue receivables $40,000.00 $12,000.00 $20,000.00 $16,000.00
Taxable (Deductible Temporary differences) $40,000.00 -$28,000.00 $8,000.00 -$4,000.00
Deferred tax liability (reversal) for the year $10,000.00 -$7,000.00 $2,000.00 -$1,000.00

JOURNAL ENTRIES - ALSUP CONSULTING

Date Particulars Debit ($) Credit ($)
31-Dec-21 Income tax expense Dr 65,000
Deferred tax liability Dr 7,000
        To Income tax payable 72,000
(To record income tax and deferred taxes)
31-Dec-22 Income tax expense Dr 57,000
        To Income tax payable 55,000
        To Deferred tax liability 2,000
(To record income tax and deferred taxes)
31-Dec-23 Income tax expense Dr 50,000
Deferred tax liability Dr 1,000
        To Income tax payable 51,000
(To record income tax and deferred taxes)

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