Question

Dixon Development began operations in December 2018. When lots for industrial development are sold, Dixon recognizes income for financial reporting purposes in the year of the sale. For some lots, Dixon recognizes income for tax purposes when collected. Income recognized for financial reporting purposes in 2018 for lots sold this way was $30 million, which will be collected over the next three years. Scheduled collections for 2019–2021 are as follows:

  

2019	$	8	million
2020		14	million
2021		8	million
	$	30	million

  
Pretax accounting income for 2018 was $38 million. The enacted tax rate is 45%.

Required:
1. Assuming no differences between accounting income and taxable income other than those described above, prepare the journal entry to record income taxes in 2018.
2. Suppose a new tax law, revising the tax rate from 45% to 40%, beginning in 2020, is enacted in 2019, when pretax accounting income was $34 million. No 2019 lot sales qualified for the special tax treatment. Prepare the appropriate journal entry to record income taxes in 2019.
3. If the new tax rate had not been enacted, what would have been the appropriate balance in the deferred tax liability account at the end of 2019?

Answer 1

Accounting Tittle	Debit	Credit
Income tax expenses	$17.10
Deferred tax liability (30*45%)		$13.50
Income tax payable(8*45%)		$3.60

Working Note-1
Pre tax accountijng income	$38
Deduct Sales revenue from lot sales	-$30
Add Collections from lot sales	$0
Taxable income	$8
Tax Rate	45%
Tax	$3.60

Accounting Tittle	Debit	Credit
Income tax expenses	$8.60
Deferred tax liability( 13.50-(8*40%)	$10.30
Income tax payable(42*45%)		$18.90

Working Note-2
Pre tax accountijng income	$34.00
Deduct Sales revenue from lot sales	$0.00
Add Collections from lot sales	$8.00
Taxable income	$42.00

3. Computation of Deferred tax liability balance on 2019
DTL balance on 2018	$13.50
Less: DTL Reversed ( 8 X 45%)	$3.60
DTL Bal on 2019	$9.90