Question

The DeVille Company reported pretax accounting income on its income statement as follows:
   

2018	$	445,000
2019		365,000
2020		435,000
2021		475,000

   
Included in the income of 2018 was an installment sale of property in the amount of $68,000. However, for tax purposes, DeVille reported the income in the year cash was collected. Cash collected on the installment sale was $27,200 in 2019, $34,000 in 2020, and $6,800 in 2021.

Included in the 2020 income was $29,000 interest from investments in municipal bonds.

The enacted tax rate for 2018 and 2019 was 30%, but during 2019 new tax legislation was passed reducing the tax rate to 25% for the years 2020 and beyond

Prepare the year-end journal entries to record income taxes for the years 2018–2021.

Answer 1

Solution:

Journal Entries

Date	Particulars	Debit $	Credit $
2018	Income tax Expense	$133,500
	Deferred Tax Expense		$20,400
	Income tax Payable		$113,100
	(To Record Income Tax Expense & DTL Created)
2019	Income tax Expense	$138,000
	Deferred Tax Expense	$10,200
	Income tax Payable		$148,200
	(To record Income Tax Expense & DTL Reversal
2020	Income Tax Expense	$127,400
	Deferred Tax Expense	$8,500
	Income tax Payable		$135,900
	(To Record Income tax Expense & DTL reversal)
2021	Income Tax Expense	$122,150
	Deferred tax Expense	$1700
	Income Tax Payable		$123,850
	(To record Income Tax Expense & DTL Reversal)

Working Notes:

Particulars	2018	2019	2020	2021
Pretax Accounting Income	$445,000	$365,000	$435,000	$475,000
Less: Installment of Sales	$(68,000)
Add: Cash Collected on installment		$27,200	$34,000	$6,800
Taxable Income	$377,000	$392,200	$469,000	$481,800
Tax Rate	30%	30%	25%	25%
Income tax Payable as per taxable	$113,100	$117,660	$117,250	$120,450
Deferred Tax liability created at the End	$20,400	$10,200	$1,700	$0
	=68000*30%	=(68,000-27200)*25%	=(68000-27200-34000)*25%	=68000-27200-34000-6800)*25%
Deferred Tax Reversal	-	$10,200	$8,500	$1,700
		=(20400-10200)	=(10200-1700)	=(1700-0)
Income Tax Expense	$133,500	$138,000	$127,450	$122,150