Question

Case Development began operations in December 2021. 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. 2021 installment income was $720,000 and will be collected over the next three years. Scheduled collections and enacted tax rates for 2022–2024 are as follows:

2022	$	160,000	30	%
2023	$	390,000	40	%
2024	$	170,000	40	%

Pretax accounting income for 2021 was $1,046,000, which includes interest revenue of $36,000 from municipal governmental bonds. The enacted tax rate for 2021 is 30%. Assume that the future change in tax rate is known in 2021.

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 2021 income taxes.

2. What is Case’s 2021 net income?

Answer 1

1.

Case Development
Computation of Deferred Tax Liability at December 31, 2021
Year	Reversal of temporary differences - Installment income	Tax Rate	Deferred Tax Liability
2022	$1,60,000.00	30%	$48,000.00
2023	$3,90,000.00	40%	$1,56,000.00
2024	$1,70,000.00	40%	$68,000.00
Total	$7,20,000.00		$2,72,000.00

Case Development
Computation of Taxable income and income tax for 2021
Particulars	Amount
Pretax financial Income	$10,46,000.00
Permanent differences:
Interest revenue on municipal bonds	-$36,000.00
Temorary differences:
Less: Installment income	-$7,20,000.00
Taxable Income	$2,90,000.00
Income tax (30%)	$87,000.00

Case Development
Journal Entries
Date	Particulars	Debit	Credit
31-Dec-21	Income tax expense Dr	$3,59,000.00
	To Income Tax Payable		$87,000.00
	To Deferred tax liability		$2,72,000.00
	(Being current income tax and deferred taxes)

2.

Net income = Pretax accounting income - Income tax expense

= $1046000 - 359000

= $687,000