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 $653 million in sales of this type. Scheduled collections for these sales are as follows:

2021	$	70	million
2022		128	million
2023		126	million
2024		156	million
2025		173	million
	$	653	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 2022, legislation revised the income tax rates so that Isaac would be taxed in 2023 and beyond at 25%, 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 2022, what deferred tax liability would Isaac report in its year-end 2022 balance sheet?

Answer 1

Answer:

Deferred tax liability would Isaac report in its year-end 2022 balance sheet = $113.75 million

Explanation:

Total future taxable income = ($126 + 156 + 173) million = $455 million× tax rate of 25% = $113.75 million

Deferred tax liability = Total future taxable income × tax rate

                                = $455 million × 25% = $113.75 million