In: Accounting
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 warranty costs of $88,000 expensed for
financial reporting purposes in 2018. For tax purposes, only the
$24,000 of warranty costs actually paid in 2018 was deducted. The
remaining $64,000 will be deducted for tax purposes when paid over
the next three years as follows:
2019 | $ | 21,600 | 30 | % |
2020 | 26,600 | 40 | ||
2021 | 15,800 | 40 | ||
Pretax accounting income for 2018 was $930,000, which
includes interest revenue of $18,000 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?
Solution 1:
Case Development | |
Computation of Taxable income and income tax for 2018 | |
Particulars | Amount |
Pretax financial Income | $930,000.00 |
Permanent differences: | |
Interest revenue on municipal bonds | -$18,000.00 |
Temorary differences: | |
Add: Warranty expense in books higher than as per tax | $64,000.00 |
Less: Installment income | -$680,000.00 |
Taxable Income | $296,000.00 |
Income tax (30%) | $88,800.00 |
Case Development | |||
Computation of Deferred Tax Liability at December 31, 2018 | |||
Year | Reversal of temporary differences - Installment income | Tax Rate | Deferred Tax Liability |
2019 | $166,000.00 | 30% | $49,800.00 |
2020 | $290,000.00 | 40% | $116,000.00 |
2021 | $224,000.00 | 40% | $89,600.00 |
Total | $680,000.00 | $255,400.00 |
Case Development | |||
Computation of Deferred Tax Assets at December 31, 2018 | |||
Year | Reversal of temporary differences -Warranty Expense | Tax Rate | Deferred Tax Liability |
2022 | $21,600.00 | 30% | $6,480.00 |
2023 | $26,600.00 | 40% | $10,640.00 |
2024 | $15,800.00 | 40% | $6,320.00 |
Total | $64,000.00 | $23,440.00 |
Case Development | |||
Journal Entries | |||
Date | Particulars | Debit | Credit |
31-Dec-21 | Income tax expense Dr | $320,760.00 | |
Deferred Tax Assets Dr | $23,440.00 | ||
To Income Tax Payable | $88,800.00 | ||
To Deferred tax liability | $255,400.00 | ||
(Being current income tax and deferred taxes) |
Solution 2:
Case's 2018 net income = Pretax income - Income tax expense = $930,000 - $320,760 = $609,240