Question

1) Isaac Inc. began operations in January 2018. For certain of its 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 2018, Isaac had $600 million in sales of this type. Scheduled collections for these

sales are as follows:

2018                                                 $ 60 million

2019                                                 120 million

2020                                                 120 million

2021                                                 150 million

2022                                                 150 million

            $ 600 million

Assume that Isaac has a 30% income tax rate and that there were no other differences in

income for financial statement and tax purposes.

Suppose that, in 2019, legislation revised the income tax rates so that Isaac would be

taxed in 2020 and beyond at 40%, rather than 30%. Assume that there were no other

differences in income for financial statement and tax purposes. Ignoring operating

expenses and additional sales in 2019, what deferred tax liability would Isaac report in

its year-end 2019 balance sheet?

2) Isaac Inc. began operations in January 2018. For certain of its 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 2018, Isaac had $600 million in sales of this type. Scheduled collections for these

sales are as follows:

2018                                                 $ 60 million

2019                                                 120 million

2020                                               120 million

2021                                                 150 million

2022                                                 150 million

                                                          $ 600 million

Assume that Isaac has a 30% income tax rate and that there were no other differences in

income for financial statement and tax purposes.

Ignoring operating expenses and additional sales in 2019, what deferred tax liability

would Isaac report in its year-end 2019 balance sheet?

3) Isaac Inc. began operations in January 2018. For certain of its 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 2018, Isaac had $600 million in sales of this type. Scheduled collections for these

sales are as follows:

2018                                                               $ 60 million

2019                                                               120 million

2020                                                               120 million

2021                                                               150 million

2022                                                               150 million

                                                                        $ 600 million

Assume that Isaac has a 30% 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 2018 balance sheet?

Answer 1

Solution 1:

Deferred tax liability would Isaac report in its year-end 2019 balance sheet = Temporary difference for installment sales to be reversed in 2020, 2021 and 2022 * Tax rate = (120 + 150 + 150)*40% = $168 million

Solution 2:

Deferred tax liability would Isaac report in its year-end 2019 balance sheet = Temporary difference for installment sales to be reversed in 2020, 2021 and 2022 * Tax rate = (120 + 150 + 150)*30% = $126 million

Solution 3:

Deferred tax liability would Isaac report in its year-end 2018 balance sheet = Temporary difference for installment sales to be reversed in 2019, 2020, 2021 and 2022 * Tax rate = (120 + 120 + 150 + 150)*30% = $162 million