Question

Jiffy started their operations December 2021. When Jiffy sells certain pieces of land for development, the company recognizes income for financial reporting purposes ("the accountant's perspective") in the year of the sale. For some pieces of land, Jiffy recognizes income for tax purposes ("the tax man's perspective") when collected. Income recognized for financial reporting purposes in 2021 for pieces of land sold this way was $26 million, which Jiffy will collect over the next three years. The collections are scheduled as follows:

2022: $10 million

2023: $13 million

2024: $3 million

Total: $26 million

Jiffy's pre-tax accounting income for 2021 was $34 million. The enacted tax rate is 45%.

1. Assume that there are no differences between taxable income and accounting income except for those described above. Please prepare the journal entry to record income taxes in 2021.
2. Next, suppose that there is a new tax law which changes the tax rate from 45% to 40%, beginning in 2023. This new law is enacted in 2022, when Jiffy's pretax accounting income was $28 million. Assume that only past land sales are affected by this tax rate change (i.e. there are no new temporary differences. Only the DTA/DTL related to the land sold in 2021 is affected). Please prepare the journal entries to record Jiffy's income taxes in 2022.
3. If the tax rate had not changed, what would the balance in the deferred tax liability account have been at the end of 2022?

Answer 1

Requirement 1)

Particulars	Amount
Pretax Accounting income	34,000,000
Less: Sales revenue from lot sales	(26,000,000)
Add: Collection from lot sales	0
Taxable income	8,000,000

Required Journal Entries:

Particulars	Debit	Credit
Tax Expense	15,300,000‬
To Deferred tax liability (45% * 26,000,000)		11,700,000
To Taxes Payable (45% * 8,000,000)		3,600,000‬
(Being income tax recorded for the year 2021)

Requirement 2)

Particulars	Amount
Pretax Accounting income	28,000,000
Less: Sales revenue from lot sales	0
Add: Collection from lot sales	8,000,000
Taxable income	20,000,000

Required Journal Entries:

Particulars	Debit	Credit
Tax Expense	2,500,000‬
Deferred tax liability [11,700,000 - (13,000,000 * 40%)]	6,500,000‬
To Taxes Payable (45% * 20,000,000)		9,000,000‬
(Being income tax recorded for the year 2022)

Required 3)

Particulars	Amount
Beginning balance in deferred tax liability	11,700,000
Less: Income Recognized (10,000,000 * 45%)	(4,500,000‬)
Balance in deferred tax liability at the end of 2022	7,200,000‬