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