Question

Motown Corporation enters into an installment sale with Max Corporation in 20X2. Motown recognizes the sale on an accrual basis (when sale is complete) for book purposes and on an installment sale method (cash) basis for tax purposes. Facts are as follows:

Initial Year of installment sale: 20X2

Revenue Recognition

   Book    Tax

20X2 136,750

20X3 50%

20X4 50%

Tax Rate 20%

Book Income

20X2 $    186,755

20X3 $    39,427

20X4 $ 122,400

1.) Calculate taxable income for 20X2.
2.) Calculate taxes payable for 20X2.
3.) Determine the current deferred tax liability at 12/31/X2.

4.) calculate total income tax expense for 20X2.
5.) Compute net income after taxes for 20X2.
6.) Calculate taxable income for 20X3.
7.) The entry required at the end of 20X3 requires:

A. Debit to the Deferred tax liability for 7,885 $

B. Debit to the Deferred tax liability for 13,675 $

C. Debit to the Deferred tax liability for 21,560 $

D. Credit to the Deferred tax liability for 7,885 $

E. Credit to the Deferred tax liability for 13,675 $

F. Credit to the Deferred tax liability for 21,560 $

G. None of the above
8.) Compute net income after taxes for 20X3.
9.) Calculate taxable income for 20X4.
10.) Compute net income after taxes for 20X4.

Answer 1

	2002	2003	2004
Book Income	$        186,755	$        39,427	$        122,400
Tax Adjustment @50%	$     (136,750)	$        68,375	$          68,375
Taxable Income	$          50,005	$     107,802	$        190,775
Income tax @20%	$          10,001	$        21,560	$          38,155
DTL/(DTA) (adjustment * 20%)	$          27,350	$     (13,675)	$        (13,675)
Income tax expense	$          37,351	$          7,885	$          24,480
Net Income(Book Income-IT expense)	$        149,404	$        31,542	$          97,920

1. Taxable Income for 20X2 = $ 50,005

2. Tax Payable for 20X2 = $ 10,001

3. Current Deferred Tax Liability for 20X2 = 136,750 * 20% = $ 27,350

4. Total Income tax expense for 20X2 =  $37,351

5. Net Income after tax for 20X2 = $149,404

6. Taxable income for 20X3 = $107,802

7. The DTL gets reversed by $13,675 (i.e., 68375*20%) therefore DTL is debited with a credit to DT.

Option B is the answer.

8. Net income after tax for 2003 = $31,542

9. Taxable income for 2004 = $190,775

10. Net income after tax for 2004 =  $97,920