Question

Ewing Company sells household furniture. Customers who purchase furniture on the installment basis make payments in equal monthly installments over a two-year period, with no down payment required. Ewing's gross profit on installment sales equals 40% of the selling price of the furniture.

For financial accounting purposes, sales revenue is recognized at the time the sale is made. For income tax purposes, however, the installment method is used. There are no other book and income tax accounting differences, and Ewing's income tax rate is 20%.

If Ewing's December 31, 2021, balance sheet includes a deferred tax liability of $900,000 arising from the difference between book and tax treatment of the installment sales, it should also include installment accounts receivable of

Answer 1

Answer:

Temporary Difference    = Deferred tax liability / Tax rate                                                  =   $900,000 / 20%                                                  = $4,500,000

Installment Accounts receivable                        =    Temporary Difference   / Percentaage of Gross profit                        =     $4,500,000 / 40%                       =   $11,250,000

Installment Accounts receivable   = $11,250,000