Question

Case Development began operations in December 2018. When property is sold on an installment basis, Case recognizes installment income for financial reporting purposes in the year of the sale. For tax purposes, installment income is reported by the installment method. 2018 installment income was $880,000 and will be collected over the next three years. Scheduled collections and enacted tax rates for 2019–2021 are as follows:

2019	$	200,000	30	%
2020		470,000	40
2021		210,000	40

Pretax accounting income for 2018 was $1,194,000, which includes interest revenue of $44,000 from municipal bonds. The enacted tax rate for 2018 is 30%.

Required:
1. Assuming no differences between accounting income and taxable income other than those described above, prepare the appropriate journal entry to record Case’s 2018 income taxes.
2. What is Case’s 2018 net income?

Answer 1

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Requirement 1
Pre Tax Accounting Income		$ 1,194,000
Less: Permanent Difference		$       44,000
Pre Tax Income subject to tax		$ 1,150,000
Less: Installment Income (to be taxed when collected)		$     880,000
Taxable Income		$     270,000
Deferred Tax Liabilitiy:
			DTL
Year 2019	$       200,000	30%	$   60,000
Year 2020	$       470,000	40%	$ 188,000
Year 2021	$       210,000	40%	$   84,000
			$ 332,000
Journal Entry:
	Debit	Credit
Tax Expense	$       413,000		plug
Deferred Tax Liability		$     332,000
Taxes Payable 270000*30%		$       81,000
Requirement 2
Pre Tax Accounting Income		$ 1,194,000
Less: Tax Expense		$     413,000
Net Income		$     781,000