Question

Problem 16-1 (Algo) Single temporary difference originates each year for four years [LO16-2]

Alsup Consulting sometimes performs services for which it receives payment at the conclusion of the engagement, up to six months after services commence. Alsup recognizes service revenue for financial reporting purposes when the services are performed. For tax purposes, revenue is reported when fees are collected. Service revenue, collections, and pretax accounting income for 2020–2023 are as follows:

	Service Revenue			Collections			Pretax Accounting Income
2020	$	688,000		$	648,000		$	214,000
2021		778,000			806,000			288,000
2022		738,000			730,000			256,000
2023		744,000			748,000			228,000

There are no differences between accounting income and taxable income other than the temporary difference described above. The enacted tax rate for each year is 25%.

(Hint: You will find it helpful to prepare a schedule that shows the balances in service revenue receivable at December 31, 2020–2023.)

Required:
1. to 3. Prepare the appropriate journal entries to record Alsup's 2021 income taxes, 2022 income taxes and 2023 income taxes. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in whole dollars.)

Answer 1

Solution:

Computation of Taxable Income and Tax Payable - Alsup Consulting
Particulars	2021	2022	2023
Pre tax accounting income	$2,88,000.00	$2,56,000.00	$2,28,000.00
Add: Service revenue collection	$8,06,000.00	$7,30,000.00	$7,48,000.00
Less: service revenue as per books	$7,78,000.00	$7,38,000.00	$7,44,000.00
Taxable income	$3,16,000.00	$2,48,000.00	$2,32,000.00
Income Tax (25%)	$79,000.00	$62,000.00	$58,000.00

Computation of Temporary differences - Alsup Consulting
Particulars	2020	2021	2022	2023
Beginning service revenue receivables	$0.00	$40,000.00	$12,000.00	$20,000.00
Service Revenue	$6,88,000.00	$7,78,000.00	$7,38,000.00	$7,44,000.00
Collection	$6,48,000.00	$8,06,000.00	$7,30,000.00	$7,48,000.00
ending service revenue receivables	$40,000.00	$12,000.00	$20,000.00	$16,000.00
Taxable (Deductible Temporary differences)	$40,000.00	-$28,000.00	$8,000.00	-$4,000.00
Deferred tax liability (reversal) for the year	$10,000.00	-$7,000.00	$2,000.00	-$1,000.00

Journal Entries - Alsup Consulting
Date	Particulars	Debit (In '000)	Credit (In '000)
31-Dec-21	Income tax expense Dr	$72,000.00
	Deferred tax liability Dr	$7,000.00
	To Income tax payable		$79,000.00
	(To record income tax and deferred taxes)
31-Dec-22	Income tax expense Dr	$64,000.00
	To Income tax payable		$62,000.00
	To Deferred tax liability		$2,000.00
	(To record income tax and deferred taxes)
31-Dec-23	Income tax expense Dr	$57,000.00
	Deferred tax liability Dr	$1,000.00
	To Income tax payable		$58,000.00
	(To record income tax and deferred taxes)