Question

Case Development began operations in December 2018. 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. 2018 installment income was $620,000 and will be collected over the next three years. Scheduled collections and enacted tax rates for 2019–2021 are as follows:

2019	$	154,000	30	%
2020		260,000	40
2021		206,000	40

Case also had product warranty costs of $82,000 expensed for financial reporting purposes in 2018. For tax purposes, only the $21,000 of warranty costs actually paid in 2018 was deducted. The remaining $61,000 will be deducted for tax purposes when paid over the next three years as follows:

2019	$	20,400	30	%
2020		25,400	40
2021		15,200	40

Pretax accounting income for 2018 was $840,000, which includes interest revenue of $12,000 from municipal bonds. The enacted tax rate for 2018 is 30%.

Required:
1. Assuming no differences between accounting income and taxable income other than those described above, prepare the appropriate journal entry to record Case’s 2018 income taxes.
2. What is Case’s 2018 net income?

Answer 1

Solution 1:

Case Development
Computation of Taxable income and income tax for 2018
Particulars	Amount
Pretax financial Income	$840,000.00
Permanent differences:
Interest revenue on municipal bonds	-$12,000.00
Temorary differences:
Add: Warranty expense in books higher than as per tax	$61,000.00
Less: Installment income	-$620,000.00
Taxable Income	$269,000.00
Income tax (30%)	$80,700.00

Case Development
Computation of Deferred Tax Liability at December 31, 2018
Year	Reversal of temporary differences - Installment income	Tax Rate	Deferred Tax Liability
2019	$154,000.00	30%	$46,200.00
2020	$260,000.00	40%	$104,000.00
2021	$206,000.00	40%	$82,400.00
Total	$620,000.00		$232,600.00

Case Development
Computation of Deferred Tax Assets at December 31, 2018
Year	Reversal of temporary differences -Warranty Expense	Tax Rate	Deferred Tax Liability
2019	$20,400.00	30%	$6,120.00
2020	$25,400.00	40%	$10,160.00
2021	$15,200.00	40%	$6,080.00
Total	$61,000.00		$22,360.00

Case Development
Journal Entries
Date	Particulars	Debit	Credit
31-Dec-18	Income tax expense Dr	$290,940.00
	Deferred Tax Assets Dr	$22,360.00
	To Income Tax Payable		$80,700.00
	To Deferred tax liability		$232,600.00
	(Being current income tax and deferred taxes)

Solution 2:

Case’s 2018 net income = Pretax accounting income - Income tax expense = $840,000 - $290,940 = $549,060