Question

Chapter 16-prob. 8

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

2018                       $370,000

2019                       290,000

2020                       360,000

2021                       400,000

Included in the income of 2018 was an installment sale of property in the amount of $36,000. However, for tax purposes, DeVille reported the income in the year cash was collected. Cash collected on the installment sale was $14,400 in 2019, $18,000 in 2020, and $3,600 in 2021.

Included in the 2020 income was $13,000 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.

Required:   Prepare the year-end journal entries to record taxes for the years 2018-2021. (If no entry is required for a transaction/event, write “No journal entry required” in the first account field.)

Date	General Journal	Debit	Credit
Dec. 31, 2018

Answer 1

Solution:

Computation of Taxable Income and Income Tax Payable
Particulars	2018	2019	2020	2021
Pretax accounting income	$370,000.00	$290,000.00	$360,000.00	$400,000.00
Less: Income from installment sale property	-$36,000.00	$0.00	$0.00	$0.00
Add: Collection of installment sales	$0.00	$14,400.00	$18,000.00	$3,600.00
Less: Interest on municipal bonds	$0.00	$0.00	-$13,000.00	$0.00
Taxable Income	$334,000.00	$304,400.00	$365,000.00	$403,600.00
Income Tax Payable	$100,200.00	$91,320.00	$91,250.00	$100,900.00

Computation of Deferred Tax
Particulars	2018	2019	2020	2021
Collection of installment sale as per tax return	$0.00	$14,400.00	$18,000.00	$3,600.00
Income from installment sales as per books	$36,000.00	$0.00	$0.00	$0.00
Taxable Temporary differences	$36,000.00	$0.00	$0.00	$0.00
Reversible Temporary differences		-$14,400.00	-$18,000.00	-$3,600.00
Deferred tax liability	$10,800.00
Reversal of Deferred tax liability 2019 = ($14,400*30% + $21,600*5%) 2020 - $18,000*25% 2021 - $3,600*25%		$5,400.00	$4,500.00	$900.00

Journal Entries - Deville Company
Year	Particulars	Debit	Credit
2018	Income Tax Expense Dr	$111,000.00
	To Income tax Payable		$100,200.00
	To Deferred tax liability		$10,800.00
	(To record income tax and deferred tax for 2018)
2019	Income Tax Expense Dr	$85,920.00
	Deferred tax liability Dr	$5,400.00
	To Income tax Payable		$91,320.00
	(To record income tax and deferred tax for 2019)
2020	Income Tax Expense Dr	$86,750.00
	Deferred tax liability Dr	$4,500.00
	To Income tax Payable		$91,250.00
	(To record income tax and deferred tax for 2020)
2021	Income Tax Expense Dr	$100,000.00
	Deferred tax liability Dr	$900.00
	To Income tax Payable		$100,900.00
	(To record income tax and deferred tax for 2021)