Question

Isaac Inc. began operations in January 2021. For some property sales, Isaac recognizes income in the period of sale for financial reporting purposes. However, for income tax purposes, Isaac recognizes income when it collects cash from the buyer's installment payments.

In 2021, Isaac had $681 million in sales of this type. Scheduled collections for these sales are as follows:

2021	$	84	million
2022		138	million
2023		130	million
2024		163	million
2025		166	million
	$	681	million

Assume that Isaac has a 25% income tax rate and that there were no other differences in income for financial statement and tax purposes.

Ignoring operating expenses, what deferred tax liability would Isaac report in its year-end 2021 balance sheet? (Round your answer to the nearest whole million.)

Multiple Choice

$132 million.

$580 million.

$149 million.

$58 million.

Answer 1

Answer: $149 million

Calculation:

Here we need to calculate the deferred tax liability would Isaac report in its year-end 2021 balance sheet after ignoring the operating expenses.

The timing difference will result the liability for the year 2021. That is we need to deduct the collections of 2021 to calculate the deferred tax liability at year-end 2021.

= Total collections - Collections in 2021

= $681 - $84

= $597 million

So the deferred tax liability is calculated by multiplying the total future taxable income with the Income tax rate of 25%.

= $597 million × 25%

= $149.25 million rounded to 149 million