Question

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 accounting income for 2016 was $126 million. The enacted tax rate is 32 percent.

Required:

1.        Assuming no differences between accounting income and taxable income other than those described above, prepare the schedule and journal entry to record income taxes in 2016.
2.        Suppose a new tax law, revising the tax rate from 32% to 21%, beginning in 2018, is enacted in 2017, when pretax accounting income was $102 million. Prepare the appropriate journal entry to record income taxes in 2017.
3.        If the new tax rate had not been enacted, what would have been the appropriate journal entry to record income taxes in 2017?

Answer 1

1) Schedule Showing Calculation of Taxable Income and Tax Liability (Amounts in Million $)

Pretax Accounting Income for 2016	126
Temporary Differences:
Less: Installment Income (to be taxed when collected)	84
Taxable Income for 2016	42
Tax Rate	32%
Income Tax Payable for 2016 ($42 million*32%)	13.44
Deferred Tax Liability ($84 million*32%)	26.88

Journal Entry for Recording Tax Expense for 2016 is shown as follows:-

  Journal Entries (Amounts in Million $)

Date	General Journal	Debit	Credit
Dec 31, 2016	Income Tax Expense (126 million*32%)	40.32
	Income Tax Payable (42 million*32%)		13.44
	Deferred Tax Liability (84 million*32%)		26.88
	(To record the income tax expense for 2016)

2) Calculation of Taxable Income and Tax Liability for 2017 (New tax rate) (Amounts in Million $)

Pretax Accounting Income for 2017	102
Temporary Differences:
Add: Collection of Sales revenue in 2017	22
Taxable Income for 2017	124
Tax Rate for 2017	32%
Income Tax Payable for 2017 ($124 million*32%)	39.68

Calculation of Deferred Tax Liability Balance (Amounts in Million $)

Required Ending Balance of Deferred Tax Liability [(84-22) million*21%]	13.02
Less: Beginning Balance of Deferred Tax Liability	26.88
Net Decrease in Deferred Tax Liability for 2017 (26.88 million - 13.02 million)	13.86

Journal Entry for Recording Tax Expense for 2017 is shown as follows:-

Journal Entries (New Tax Rate) (Amounts in Million $)

Date	General Journal	Debit	Credit
Dec 31, 2017	Income Tax Expense (39.68 million - 13.86 million)	25.82
	Deferred Tax Liability (Decrease in Balance)	13.86
	Income Tax Payable (124 million*32%)		39.68
	(To record the income tax expense for 2017)

3) If New Tax Rate has not been Enacted:-

Calculation of Deferred Tax Liability Balance (Amounts in Million $)

Required Ending Balance of Deferred Tax Liability [(84-22) million*32%]	19.84
Less: Beginning Balance of Deferred Tax Liability	26.88
Net Decrease in Deferred Tax Liability for 2017 (26.88 million - 19.84 million)	7.04

Journal Entry for Recording Tax Expense for 2017 is shown as follows:-

Journal Entries (Amounts in Million $)

Date	General Journal	Debit	Credit
Dec 31, 2017	Income Tax Expense (102 million*32%)	32.64
	Deferred Tax Liability (22 million*32%)	7.04
	Income Tax Payable (124 million*32%)		39.68
	(To record the income tax expense for 2017)