Question

Sicora Inc. reported installment sales totaling $670,000 in its income statement for Year 1, its first year of operations. Sicora is not required to report installment sales income on its tax return until the cash is collected. Sicora will make the collections on these installment sales as follows: Year 1 $ 70,000 Year 2 130,000 Year 3 140,000 Year 4 160,000 Year 5 170,000 Total $ 670,000 The enacted tax rate is 30% in each of these years. What is the ending balance in the deferred tax liability account related to these installment sales at the end of Year 1?

Answer 1

$180,000 will be the balance in deferred tax liability account related to these installment sales in year 1.

out of total installment sale of $670,000 in year 1 , only $70,000 is collected in year 1.

=> $670,000 - $70,000 =>$600,000 will be collected in future years.

This $600,000 revenue recognition for tax purpose is to be deferred to the years in which it is collected,

So balance in deferred tax liability account in year 1 will be = income deferred * tax rate

=>600,000 * 30%

=>$180,000.