Question

Problem 16-1 Single temporary difference originates each year for four years [LO16-1]

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	$	718,000		$	698,000		$	270,000
2018		830,000			840,000			335,000
2019		795,000			775,000			305,000
2020		780,000			805,000			285,000

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

Journal Entries:

Year 2017	Income tax Expense A/c	Dr	64000
	Income Tax Payable A/c	Cr		64000
	Deferred Tax Expense A/c	Dr	8000
	Deferred Tax Liability A/c	Cr		8000
	(Total Tax Expense = 64000+8000=72000)
Year 2018	Income tax Expense A/c	Dr	102000
	Income Tax Payable A/c	Cr		102000
	Deferred Tax Liability A/c	Dr	4000
	Deferred Tax Income A/c	Cr		4000
	(Total Tax Expense = 102000-4000=98000)
Year 2019	Income tax Expense A/c	Dr	72000
	Income Tax Payable A/c	Cr		72000
	Deferred Tax Expense A/c	Dr	14000
	Deferred Tax Liability A/c	Cr		14000
	(Total Tax Expense = 72000+14000=86000)
Year 2020	Income tax Expense A/c	Dr	86000
	Income Tax Payable A/c	Cr		86000
	Deferred Tax Liability A/c	Dr	8000
	Deferred Tax Income A/c	Cr		8000
	(Total Tax Expense = 86000-8000=78000)

Total 'Tax Expense' for each year will be 40% of Pre Tax Accounting Profit.

Working:

Revenue (For Accounts Purpose)	Revenue (For Tax Purpose)	Temporary Difference	Cumulative Difference	Closing balance of Deferred Tax Liability / (Asset)	Deferred Tax Expense / (Income) for the year
(A)	(B)	[C]=(A)-(B)	(D)	[E]=(D) * 40%	(F) = C * 40%
637000	617000	20000	20000	8000	8000
740000	750000	(10000)	10000	4000	(4000)
705000	670000	35000	45000	18000	14000
690000	710000	(20000)	25000	10000	(8000)