Question

In: Accounting

Dixon Development began operations in December 2018. When lots for industrial development are sold, Dixon recognizes...

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?

Solutions

Expert Solution

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


Related Solutions

Dixon Development began operations in December 2018. When lots for industrial development are sold, Dixon recognizes...
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...
Dixon Development began operations in December 2018. When lots for industrial development are sold, Dixon recognizes...
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...
Dixon Development began operations in December 2018. When lots for industrial development are sold, Dixon recognizes...
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...
Dixon Development began operations in December 2018. When lots for industrial development are sold, Dixon recognizes...
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 $28 million, which will be collected over the next three years. Scheduled collections for 2019–2021 are as follows: 2019 $ 8 million 2020 13 million 2021 7 million...
Dixon Development began operations in December 2018. When lots for industrial development are sold, Dixon recognizes...
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 $15 million, which will be collected over the next three years. Scheduled collections for 2019–2021 are as follows:    2019 $ 5 million 2020 7 million 2021 3...
Dixon Development began operations in December 2021. When lots for industrial development are sold, Dixon recognizes...
Dixon Development began operations in December 2021. 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 2021 for lots sold this way was $12 million, which will be collected over the next three years. Scheduled collections for 2022–2024 are as follows: 2022 $ 2 million 2023 6 million 2024 4 million...
Popeye’s Development began operations in December 2016. When lots for industrial development are sold, Popeye’s recognizes...
Popeye’s Development began operations in December 2016. When lots for industrial development are sold, Popeye’s recognizes income for financial reporting purposes in the year of the sale. For some lots, Popeye’s recognizes income for tax purposes when collected. Income recognized for financial reporting purposes in 2016 for lots sold this way was $84 million which will be collected over the next three years. Scheduled collections for 2017-2019 are as follows: 2017: 22 million 2018: 28 million 2019: 34 million Pretax...
Case Development began operations in December 2018. When property is sold on an installment basis, Case...
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 $680,000 and will be collected over the next three years. Scheduled collections and enacted tax rates for 2019–2021 are as follows: 2019 $ 166,000 30 % 2020 290,000 40 2021 224,000 40 Case also had product...
Case Development began operations in December 2018. When property is sold on an installment basis, Case...
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...
Case Development began operations in December 2018. When property is sold on an installment basis, Case...
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 $620,000 and will be collected over the next three years. Scheduled collections and enacted tax rates for 2019–2021 are as follows: 2019 $ 154,000 30 % 2020 260,000 40 2021 206,000 40 Case also had product...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT