Question

Small Tractor Inc. reported pretax accounting income in 2021, 2022, and 2023 of $10 million, $14 million, and $16 million, respectively, which includes 2021 income of $4 million from installment sales of property. However, the installment sales are reported on the tax return when collected, in 2022 ($2 million) and 2023 ($2 million). The enacted tax rate is 25% for each year. Required: 1) Prepare a compound journal entry to record the income tax expense for the year 2021. 2) Prepare a compound journal entry to record the income tax expense for the year 2022. 3) Prepare a compound journal entry to record the income tax expense for the year 2023.

Answer 1

JOURNAL ENTRY (In millions)

Year 2021

1.Income Tax Expense A/c...........................Dr. $ 2.5

To Income Tax Payable............................................$ 1.5

To Deferred Tax Liabiity............................................$ 1

Working Note:

Income Tax Expense = $10million * 25% = $2.5 million

Deferred Tax Liability = $ 4 million * 25% = $1 million

Year 2022

2. Deferred Tax Liability A/c..........................................Dr.$ 0.5

Income Tax Expense A/c...........................................Dr. $ 3.0

To Income Tax Payable. ........................................................$ 3.5

Working Note:

Income Tax expense for current year = $14* 25% = $3.5 million

Deferred Tax liability reversal on income of $2 million taxable in 2022= $2 * 25% = $ 0.5 million

Year 2023

3.Deferred Tax Liability A/c..........................................Dr.$ 0.5

Income Tax Expense A/c...........................................Dr. $ 3.5

To Income Tax Payable. ........................................................$ 4

Working Note:

Income Tax expense for current year = $16* 25% = $ 4 million

Deferred Tax liability reversal is $0.5 million