In: Accounting
Case Development began operations in December 2021. When property is sold on an installment basis, Case recognizes installment income for financial reporting purposes in the year of the sale. For tax purposes, installment income is reported by the installment method. 2021 installment income was $888,000 and will be collected over the next three years. Scheduled collections and enacted tax rates for 2022–2024 are as follows:
2022
2023
2024
$300,000 20% 324,000 25 264,000 25
Case also had product warranty costs of $352,000 expensed for financial reporting purposes in 2021. For tax purposes, only the $84,000 of warranty costs actually paid in 2021 was deducted. The remaining $268,000 will be deducted for tax purposes when paid over the next three years as follows:
2022 $100,000
2023 88,000
2024 80,000
Pretax accounting income for 2021 was $1,016,000, which includes interest revenue of $26,000 from municipal bonds. The enacted tax rate for 2021 is 20%.
Required:
Assuming no differences between accounting income and taxable income other than those described above, prepare the appropriate journal entry to record Case’s 2021 income taxes.
What is Case’s 2021 net income?
Assume that all of Case’s deferred tax assets and liabilities are in the same tax jurisdictions.
How should the deferred tax amounts be shown on Case’s balance sheet?
1.
Case Development | |||
Computation of Deferred Tax Liability at December 31, 2021 | |||
Year | Reversal of temporary differences - Installment income | Tax Rate | Deferred Tax Liability |
2022 | $3,00,000.00 | 20% | $60,000.00 |
2023 | $3,24,000.00 | 25% | $81,000.00 |
2024 | $2,64,000.00 | 25% | $66,000.00 |
Total | $8,88,000.00 | $2,07,000.00 |
Case Development | |||
Computation of Deferred Tax Assets at December 31, 2021 | |||
Year | Reversal of temporary differences -Warranty Expense | Tax Rate | Deferred Tax Liability |
2022 | $1,00,000.00 | 20% | $20,000.00 |
2023 | $88,000.00 | 25% | $22,000.00 |
2024 | $80,000.00 | 25% | $20,000.00 |
Total | $2,68,000.00 | $62,000.00 |
Case Development | |
Computation of Taxable income and income tax for 2021 | |
Particulars | Amount |
Pretax financial Income | $10,16,000.00 |
Permanent differences: | |
Interest revenue on municipal bonds | -$26,000.00 |
Temorary differences: | |
Add: Warranty expense in books higher than as per tax | $2,68,000.00 |
Less: Installment income | -$8,88,000.00 |
Taxable Income | $3,70,000.00 |
Income tax (20%) | $74,000.00 |
Case Development | |||
Journal Entries | |||
Date | Particulars | Debit | Credit |
31-Dec-21 | Income tax expense Dr | $2,19,000.00 | |
Deferred Tax Assets Dr | $62,000.00 | ||
To Income Tax Payable | $74,000.00 | ||
To Deferred tax liability | $2,07,000.00 | ||
(Being current income tax and deferred taxes) |
2.
Net income = 1016000 - 219000 = $797,000
3.
Balance Sheet (Partial) As on 31.12.2021 |
||
Particulars | Amount | |
Non Current Assets: | ||
Deferred tax Asssets | $62,000.00 | |
Long term liabilities | ||
Deferred tax liability | $2,07,000.00 |