Question

Dixon Development began operations in December 2021. When lots for industrial development are sold, Dixon recognizes income for financial reporting purposes in the year of the sale. For some lots, Dixon recognizes income for tax purposes when collected. Income recognized for financial reporting purposes in 2021 for lots sold this way was $12 million, which will be collected over the next three years. Scheduled collections for 2022–2024 are as follows:

2022	$	2	million
2023		6	million
2024		4	million
	$	12	million

Pretax accounting income for 2021 was $16 million. The enacted tax rate is 30%.

1. Assuming no differences between accounting income and taxable income other than those described above, prepare the journal entry to record income taxes in 2021. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in millions rounded to 1 decimal place (i.e., 5,500,000 should be entered as 5.5).)

Journal entry worksheet

• Record 2021 income taxes.

	Date General Journal Debit Credit Dec 31, 2021

2. Suppose a new tax law, revising the tax rate from 30% to 25%, beginning in 2023, is enacted in 2022, when pretax accounting income was $13 million. No 2022 lot sales qualified for the special tax treatment. Prepare the appropriate journal entry to record income taxes in 2022. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in millions rounded to 1 decimal place (i.e., 5,500,000 should be entered as 5.5).)

Journal entry worksheet

• Record 2022 income taxes

	Date General Journal Debit Credit Dec 31, 2022

3.

If the new tax rate had not been enacted, what would have been the appropriate balance in the deferred tax liability account at the end of 2022? (Enter your answer in millions rounded to 1 decimal place (i.e., 5,500,000 should be entered as 5.5).

	Balance in the deferred tax liability    million

Answer 1

1.

Pretax accounting income	$16 million
Deduct: Sales revenue from lot sales	($12 millions)
Add: Collection from lot sales	0
Taxable income	$4 millions

Journal entry-

Tax expense	$4.8 millions
Deferred tax liability ($12 millions*30%)		$3.6 millions
Taxes payable ($4 millions*30%)		$1.2 millions

2.

Pretax accounting income	$13 million
Deduct: Sales revenue from lot sales	0
Add: Collection from lot sales	$2 millions
Taxable income	$15 millions

Future taxable amount = $6 + $4 = $10 millions

Deferred tax liability = 10 millions * 25% = $2.5 millions

Ending balance	$2.5
Less: Beginning balance ($12 millions*30%)	($3.6)
Change needed to achieve desired balance	$1.1

Journal entry-

Tax expense	$3.4 millions
Deferred tax liability	$1.1 millions
Taxes payable ($15 millions*30%)		$4.5 millions

3. Deferred tax liability= Future taxable amount * Previous tax rate

   = $10 million * 30% = $3 million

Deferred tax liability= $3 million