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 $24 million, which will be collected over the next three years. Scheduled collections for 2019–2021 are as follows:

  

2019 $ 8 million
2020 12 million
2021 4 million
$ 24 million

  
Pretax accounting income for 2018 was $33 million. The enacted tax rate is 40%.

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 40% to 35%, beginning in 2020, is enacted in 2019, when pretax accounting income was $27 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:

Dixon Development
Computation of taxable income, income tax and deferred tax
For 2018
Particulars	Amount
Pretax accounting Income	$33,000,000.00
Less: Taxable temporary differences	$24,000,000.00
Taxable income	$9,000,000.00
Tax rate	40%
Income tax payable	$3,600,000.00
Deferred tax liability ($24,000,000*40%)	$9,600,000.00

Journal Entries - Dixon Development
Date	Particulars	Debit	Credit
31-Dec-18	Income tax expense Dr	$13,200,000.00
	To Income taxes payable		$3,600,000.00
	To Deferred tax liability		$9,600,000.00
	(To record income tax expense and deferred taxes)

Solution 2:

Dixon Development
Computation of taxable income, income tax and deferred tax
For 2019
Particulars	Amount
Pretax accounting Income	$27,000,000.00
Add: Reversal of Taxable temporary differences	$8,000,000.00
Taxable income	$35,000,000.00
Tax rate	40%
Income tax payable	$14,000,000.00
Required Deferred tax liability balance ($16,000,000*35%)	$5,600,000.00
Reversal of deferred tax liability	$4,000,000.00

Journal Entries - Dixon Development
Date	Particulars	Debit	Credit
31-Dec-19	Income tax expense Dr	$10,000,000.00
	Deferred tax liability Dr	$4,000,000.00
	To Income taxes payable		$14,000,000.00
	(To record income tax expense and deferred taxes)

Solution 3:

If the new tax rate had not been enacted, appropriate balance in the deferred tax liability account at the end of 2019 = $16,000,000*40% = $6,400,000