Question

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	$	688,000		$	653,000		$	220,000
2018		780,000			795,000			285,000
2019		745,000			715,000			255,000
2020		730,000			760,000			235,000

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. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in thousands.)

Answer 1

SOLUTION

2017-

	Amount ($)
Pretax accounting income	220,000
Deduct: Service revenue	(688,000)
Add: Cash collections	653,000
Taxable income	185,000

Journal Entry-

Account titles and Explanations	Debit ($)	Credit ($)
Tax expense	88,000
Deferred tax liability [($688,000-$653,000)*40%]		14,000
Taxes payable ($185,000*40%)		74,000

2018-

	Amount ($)
Pretax accounting income	285,000
Deduct: Service revenue	(780,000)
Add: Cash collections	795,000
Taxable income	300,000

Journal Entry-

Account titles and Explanations	Debit ($)	Credit ($)
Tax expense	114,000
Deferred tax liability [($795,000-$780,000)*40%]	6,000
Taxes payable ($300,000*40%)		120,000

2019-

	Amount ($)
Pretax accounting income	255,000
Deduct: Service revenue	(745,000)
Add: Cash collections	715,000
Taxable income	225,000

Journal Entry-

Account titles and Explanations	Debit ($)	Credit ($)
Tax expense	102,000
Deferred tax liability [($745,000-$715,000)*40%]		12,000
Taxes payable ($225,000*40%)		90,000

2020-

	Amount ($)
Pretax accounting income	235,000
Deduct: Service revenue	(730,000)
Add: Cash collections	760,000
Taxable income	265,000

Journal Entry-

Account titles and Explanations	Debit ($)	Credit ($)
Tax expense	94,000
Deferred tax liability [($760,000-$730,000)*40%]	12,000
Taxes payable ($265,000*40%)		106,000