Question

Chapter 16—Prob. 6

Alsup Consulting sometimes performs services for which it receives payment at the conclusion of the engagement, up to six months after services commence. Alsup recognizes service revenue for financial reporting purposes when the services are performed. For tax purposes, revenue is reported when fees are collected. Service revenue, collections, and pretax accounting income for 2017-2020 are as follows:

                          Service Revenue                 Collections                     Pretax Accounting

                                                                                                                                Income

2017                       $610,000                              $590,000                              $150,000

2018                          710,000                                720,000                             215,000

2019                      675,000                             650,000                            185,000

2020                       660,000                            685,000                            165,000

There are no differences between accounting income and taxable income other than the temporary difference described above. The enacted tax rate for each year is 40%. (Hint: You may find it helpful to prepare a schedule that shows the balances in service revenue receivable at December 31, 2017-2020,)

Required:

1. Prepare the appropriate journal entry to record Alsup’s 2018 income taxes, Alsup’s 2019 income taxes and Alsup’s 2020 income taxes. (Enter your answers in thousands. e.g. 150,000 should be entered as 150).)

Event	General Journal	Debit	Credit

Answer 1

Solution:

Computation of Taxable Income and Tax Payable - Alsup Consulting
Particulars	2018	2019	2020
Pre tax accounting income	$215,000.00	$185,000.00	$165,000.00
Add: Service revenue collection	$720,000.00	$650,000.00	$685,000.00
Less: service revenue as per books	$710,000.00	$675,000.00	$660,000.00
Taxable income	$225,000.00	$160,000.00	$190,000.00
Income Tax (40%)	$90,000.00	$64,000.00	$76,000.00

Computation of Temporary differences - Alsup Consulting
Particulars	2017	2018	2019	2020
Beginning service revenue receivables	$0.00	$20,000.00	$10,000.00	$35,000.00
Service Revenue	$610,000.00	$710,000.00	$675,000.00	$660,000.00
Collection	$590,000.00	$720,000.00	$650,000.00	$685,000.00
ending service revenue receivables	$20,000.00	$10,000.00	$35,000.00	$10,000.00
Taxable (Deductible Temporary differences)	$20,000.00	-$10,000.00	$25,000.00	-$25,000.00
Deferred tax liability (reversal) for the year	$8,000.00	-$4,000.00	$10,000.00	-$10,000.00

Journal Entries - Alsup Consulting
Date	Particulars	Debit (In '000)	Credit (In '000)
31-Dec-18	Income tax expense Dr	$86.00
	Deferred tax liability Dr	$4.00
	To Income tax payable		$90.00
	(To record income tax and deferred taxes)
31-Dec-19	Income tax expense Dr	$74.00
	To Income tax payable		$64.00
	To Deferred tax liability		$10.00
	(To record income tax and deferred taxes)
31-Dec-20	Income tax expense Dr	$66.00
	Deferred tax liability Dr	$10.00
	To Income tax payable		$76.00
	(To record income tax and deferred taxes)