Question

Pitou Co. disposed of certain property in 2012 for $500,000. The transaction is accounted for using the installment sales method for tax purposes and the accrual method for financial reporting purposes. The payments will be made to Pitou over the next 2 years as follows: $200,000 in 2013 and $300,000 in 2014. For 2012, Pitou’s Co.’s pretax financial income is $1,500,000. Pitou’s applicable tax rate is 34%.

Part A

Based on this information, prepare the journal entry at December 31, 2012 to account for the tax effect of the transaction listed above.

Part B

Assuming Pitou has pretax financial income in the amount of $1,450,000 in 2013 and that the required amount from the installment sale has been collected, record the journal entry to account for the tax effect of the installment sale at December 31, 2013.

Answer 1

In 2012

Pretax Income	1,500,000
Less: Temporary Difference
Instalment sale not collected	(500,000)
Taxable Income	1,000,000

Tax Payable = 1,000,000 * 34% = $340,000

Deferred tax liability = 500,000 * 34% = $170,000

Total Tax expense = (340,000 + 170,000) = $510,000

Account titles and explanation	Debit	Credit
Tax expense	510,000
Tax payable		340,000
Deferred tax liability		170,000
(to record tax expense and deferred tax liability)

In 2013

Pretax Income	1,450,000
Add: Temporary Difference
Instalment sale collected	200,000
Taxable Income	1,650,000

Tax Payable = 1,650,000 * 34% = $561,000

Deferred tax Assets = 200,000 * 34% = $68,000

Tax expenses = (561,000 -68,000) = $493,000

Net Deferred tax liability = (170,000 – 68,000) = $102,000

Account titles and explanation	Debit	Credit
Tax expense	493,000
Deferred tax liability	68,000
Tax Payable		561,000
(to record tax expense and adjustment to deferred tax liability)