Question

Keystone Development (KD) began operations in October, 2019 and adopted ASPE-future tax method.

When property is sold on an instalment basis, KD recognizes instalment income for accounting purposes in the year of the sale. For tax purposes, instalment income is recognized as cash collections relating to the properties are made. Gross profit from instalment sales for 2019 was $600,000 and will result in taxable revenue as collections are made over the next three years (with the respective tax rates) as follows:

                                2020                       $150,000              30%

                                2021                       $250,000              40%

                                2022                       $200,000              40%

KD also had product warranty expenses for accounting purposes in 2019 of $80,000 of which only $20,000 was paid in cash (tax deductibility is only for cash payments) with the balance to be paid over the next three years as follows:

                                2020                       $20,000

                                2021                       $25,000

                                2022                       $15,000

Pretax accounting income for 2019 was $810,000 which included dividend revenue from taxable Canadian corporations of $10,000 which is not taxable. The tax rate in 2019 is 30%.

Required:

1. Prepare the appropriate journal entry to record KD’s 2019 income taxes.
2. Provide the income statement excerpt for KD beginning with net income before tax for 2019.
3. How should the future income tax amounts be classified in the balance sheet at December 31, 2019?

Answer 1