Question

Case Development began operations in December 2021. 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. 2021 installment income was $780,000 and will be collected over the next three years. Scheduled collections and enacted tax rates for 2022–2024 are as follows: 2022 $ 240,000 20% 2023 300,000 25 2024 240,000 25 Case also had product warranty costs of $250,000 expensed for financial reporting purposes in 2021. For tax purposes, only the $60,000 of warranty costs actually paid in 2021 was deducted. The remaining $190,000 will be deducted for tax purposes when paid over the next three years as follows: 2022 $70,000 2023 64,000 2024 56,000 Pretax accounting income for 2021 was $950,000, which includes interest revenue of $20,000 from municipal bonds. The enacted tax rate for 2021 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 2021 income taxes.

2. What is Case’s 2021 net income?

3. Assume that all of Case’s deferred tax assets and liabilities are in the same tax jurisdictions. How should the deferred tax amounts be shown on Case’s balance sheet?

Answer 1

Solution 1:

Computation of Taxable income and income tax for 2021
Particulars	Amount
Pretax financial Income	$950,000.00
Permanent differences:
Interest revenue on municipal bonds	-$20,000.00
Temporary differences:
Add: Warranty expense in books higher than as per tax	$190,000.00
Less: Installment income	-$780,000.00
Taxable Income	$340,000.00
Income tax (20%)	$68,000.00

Computation of Deferred Tax Liability at December 31, 2021
Year	Reversal of temporary differences - Installment income	Tax Rate	Deferred Tax Liability
2022	$240,000.00	20%	$48,000.00
2023	$300,000.00	25%	$75,000.00
2024	$240,000.00	25%	$60,000.00
Total	$780,000.00		$183,000.00
Case Development
Computation of Deferred Tax Assets at December 31, 2021
Year	Reversal of temporary differences -Warranty Expense	Tax Rate	Deferred Tax Liability
2022	$70,000.00	20%	$14,000.00
2023	$64,000.00	25%	$16,000.00
2024	$56,000.00	25%	$14,000.00
Total	$190,000.00		$44,000.00

Case Development
Journal Entries
Date	Particulars	Debit	Credit
31-Dec-21	Income tax expense Dr	$207,000.00
	Deferred Tax Assets Dr	$44,000.00
	To Income Tax Payable		$68,000.00
	To Deferred tax liability		$183,000.00
	(Being current income tax and deferred taxes)

Solution 2:

Net income for 2021 = Pretax income - Income tax expense = $950,000 - $207,000 = $743,000

Solution 3:

Case Development
Balance Sheet (Partial) As on 31.12.2021
Particulars		Amount
Non Current Assets:
Deferred tax Asssets		$44,000.00
Long term liabilities
Deferred tax liability		$183,000.00