Question

Gallo Light began operations in 2018. The company sometimes sells used warehouses on an installment basis. In those cases, Gallo Light reports income in its income statement in the year of the sale. In its income tax return, though, Gallo Light reports installment income by the installment method. Installment income in 2018 was $90,000, which Gallo Light expects to collect equally over the next three years. The tax rate is 30%.

Gallo Light's pretax accounting income from the 2018 income statement was $830,000, which includes $40,000 of interest revenue from an investment in municipal bonds. There were no differences between accounting income and taxable income other than those described above.

Required:

1. Prepare the appropriate journal entry to record Gallo Light's 2018 income taxes. Show calculations.

2. What is Gallo Light's 2018 net income?

Answer 1

1. Working:

	2018	2019	2020	2021	Total
Accounting income	830,000
Permanent difference	(40,000)
Temporary difference-
Installment sales	(90,000)	(90,000/3) = 30,000	30,000	30,000
Taxable income	700,000
Enacted tax rate	30%	30%	30%	30%
Currently tax payable	210,000
Deferred tax liability		9,000	9,000	9,000	27,000

Journal entry-

Accounts titles and Explanation	Debit ($)	Credit ($)
Income tax expense	237,000
Deferred tax liability		27,000
Income tax payable		210,000
(To record income taxes)

2.

	Amount ($)
Pretax accounting income	830,000
Income tax expense	(237,000)
Net income	593,000