Question

The DeVille Company reported pretax accounting income on its income statement as follows:

2021	$	385,000
2022		305,000
2023		375,000
2024		415,000

Included in the income of 2021 was an installment sale of property in the amount of $42,000. However, for tax purposes, DeVille reported the income in the year cash was collected. Cash collected on the installment sale was $16,800 in 2022, $21,000 in 2023, and $4,200 in 2024.

Included in the 2023 income was $17,000 interest from investments in municipal governmental bonds.

The enacted tax rate for 2021 and 2022 was 40%, but during 2022, new tax legislation was passed reducing the tax rate to 25% for the years 2023 and beyond.

Required:
Prepare the year-end journal entries to record income taxes for the years 2021–2024. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Solution:

Computation of Taxable Income and Income Tax Payable
Particulars	2021	2022	2023	2024
Pretax accounting income	$385,000.00	$305,000.00	$375,000.00	$415,000.00
Less: Income from installment sale property	-$42,000.00	$0.00	$0.00	$0.00
Add: Collection of installment sales	$0.00	$16,800.00	$21,000.00	$4,200.00
Less: Interest on municipal bonds	$0.00	$0.00	-$17,000.00	$0.00
Taxable Income	$343,000.00	$321,800.00	$379,000.00	$419,200.00
Income Tax Payable	$137,200.00	$128,720.00	$94,750.00	$104,800.00
Computation of Deferred Tax
Particulars	2021	2022	2023	2024
Collection of installment sale as per tax return	$0.00	$16,800.00	$21,000.00	$4,200.00
Income from installment sales as per books	$42,000.00	$0.00	$0.00	$0.00
Taxable Temporary differences	$42,000.00	$0.00	$0.00	$0.00
Reversible Temporary differences		-$16,800.00	-$21,000.00	-$4,200.00
Deferred tax liability	$16,800.00
Reversal of Deferred tax liability 2022 = ($16,800*40% + $25,200*15%) 2023 - $21,000*25% 2024 - $4,200*25%		$10,500.00	$5,250.00	$1,050.00

Journal Entries - Deville Company
Year	Particulars	Debit	Credit
2021	Income Tax Expense Dr	$154,000.00
	To Income tax Payable		$137,200.00
	To Deferred tax liability		$16,800.00
	(To record income tax and deferred tax for 2021)
2022	Income Tax Expense Dr	$118,220.00
	Deferred tax liability Dr	$10,500.00
	To Income tax Payable		$128,720.00
	(To record income tax and deferred tax for 2022)
2023	Income Tax Expense Dr	$89,500.00
	Deferred tax liability Dr	$5,250.00
	To Income tax Payable		$94,750.00
	(To record income tax and deferred tax for 2023)
2024	Income Tax Expense Dr	$103,750.00
	Deferred tax liability Dr	$1,050.00
	To Income tax Payable		$104,800.00
	(To record income tax and deferred tax for 2024)