Question

Case Development began operations in December 2016. 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. 2016 installment income was $320,000 and will be collected over the next three years. Scheduled collections and enacted tax rates for 2017–2019 are as follows:

  

2017	$	60,000	20	%
2018		190,000	30
2019		70,000	30

  

Pretax accounting income for 2016 was $426,000, which includes interest revenue of $16,000 from municipal bonds. The enacted tax rate for 2016 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 2016 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.)

     

2.	What is Case’s 2016 net income? (Enter your answer in thousands.)

     

3.	How should the deferred tax amount be classified in a classified balance sheet? (Enter your answers in thousands.)

    

Answer 1

SOLUTION

(A) Journal Entry-

Accounts title and Explanations	Debit ($)	Credit ($)
Tax expense	108,000
Deferred tax liability		90,000
Taxes payable ($90,000 * 20%)		18,000

Explanation-

Particulars	Amount ($)
Pretax accounting income	426,000
Deduct: Permanent difference - municipal bond interest	(16,000)
Pretax accounting income subject to tax	410,000
Temporary difference:
Installment income (taxable when collected)	(320,000)
Taxable income	90,000

Deferred tax liability=

= ($60,000 * 20%) + ($190,000 * 30%) + ($70,000 * 30%)

= $12,000 + $57,000 + $21,000

= $90,000

(B)

Particulars	Amount ($)
Pretax accounting income	426,000
Less: Tax expense	(108,000)
Net income	318,000

(C) Current Assets- 2017 Installment Receivables - $60,000

Therefore, $60,000 * 20% = $12,000 (Deferred tax liability), Current Liabilities

Non- Current Assets- 2018, 2019 Installment Receivables - $190,000 & $70,000

Therefore, 30% * ($190,000 + $70,000) = $78,000 , (Deferred tax liability), Long term Liabilities