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 $600,000 and will be collected over the next three years. Scheduled collections and enacted tax rates for 2019–2021 are as follows:

2019	$	130,000	20	%
2020		330,000	30
2021		140,000	30

Pretax accounting income for 2018 was $780,000, which includes interest revenue of $30,000 from municipal bonds. The enacted tax rate for 2018 is 20%.

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

a. ($ in thousands)

	2018	2019	2020	2021
Pretax accounting income	780
Permanent difference	(30)
Temporary difference:
Installment sales	(600)	130	330	140
Taxable income (tax return)	150
Enacted tax rate	20%	20%	30%	30%
Tax payable currently	30
Deferred tax liability		26	99	42
					167

Deferred tax liability:

Ending balance (balance currently needed) $167

Less: beginning balance                                                   (0)

Change needed to achieve desired balance $167

General Journal	Debit	Credit
Income tax expense (to balance)	197
Deferred tax liability (determined above)		167
Income Tax payable		30

b. Net Income = $ 780 - $197 = $583