Question

Dixon Development began operations in December 2018. When lots for industrial development are sold, Dixon recognizes income for financial reporting purposes in the year of the sale. For some lots, Dixon recognizes income for tax purposes when collected. Income recognized for financial reporting purposes in 2018 for lots sold this way was $16 million, which will be collected over the next three years. Scheduled collections for 2019–2021 are as follows:

  

2019	$	4	million
2020		7	million
2021		5	million
	$	16	million

  
Pretax accounting income for 2018 was $28 million. The enacted tax rate is 35%.

Required:
1. Assuming no differences between accounting income and taxable income other than those described above, prepare the journal entry to record income taxes in 2018.
2. Suppose a new tax law, revising the tax rate from 35% to 30%, beginning in 2020, is enacted in 2019, when pretax accounting income was $26 million. No 2019 lot sales qualified for the special tax treatment. Prepare the appropriate journal entry to record income taxes in 2019.
3. If the new tax rate had not been enacted, what would have been the appropriate balance in the deferred tax liability account at the end of 2019?

Answer 1

SOLUTION

1. Computation of amount of income tax payable and deferred tax liability-

Amounts are in $millions

	2018	2019	2020	2021	Total
Pre-tax accounting income	28
Temporary difference-
Lot sales	(16)	4	5	7	16
Taxable income (tax return)	12
Enacted tax rate	35%				35%
Income tax payable	4.20
Deferred tax liability					5.60

Calculation of desired balance of deferred tax liability-

Particulars	Deferred tax liability
Ending balance (current balance needed)	5,600,000
Less: Beginning balance	0
Changes needed to achieve desired balance	(5,600,000)

Journal entry-

Year	Accounts titles and Explanation	Debit ($)	Credit ($)
2018	Income tax expense	9,800,000
	Income tax payable		4,200,000
	Deferred tax liability		5,600,000
	(To record the income tax provision for 2018)

2. Computation of amount of income tax payable and deferred tax liability-

Amounts are in $millions

	2019	2020	2021	Total
Pre-tax accounting income	26
Temporary difference-
Lot sales	4	5	7	12
Taxable income (tax return)	22
Enacted tax rate	35%			30%
Income tax payable	7.70
Deferred tax liability				3.60

Calculation of desired balance of deferred tax liability-

Particulars	Deferred tax liability
Ending balance (current balance needed)	3,600,000
Less: Beginning balance	(5,600,000)
Changes needed to achieve desired balance	(2,000,000)

Journal entry-

Year	Accounts titles and Explanation	Debit ($)	Credit ($)
2019	Income tax expense	5,700,000
	Deferred tax liability	2,000,000
	Income tax payable		7,700,000
	(To record the income tax provision for 2019)

3. Appropriate balance in the deferred tax liability account at the end of 2019-

Particulars	Amount ($)
Future taxable amount	12,000,000
Previous tax rate	35%
Deferred tax liability	4,200,000