Question

Case Development began operations in December 2018. When property is sold on an installment basis, Case recognizes installment income for financial reporting purposes in the year of the sale. For tax purposes, installment income is reported by the installment method. 2018 installment income was $240,000 and will be collected over the next three years. Scheduled collections and enacted tax rates for 2019–2021 are as follows:

2019	$	40,000	20	%
2020		150,000	30
2021		50,000	30

Pretax accounting income for 2018 was $402,000, which includes interest revenue of $12,000 from municipal bonds. The enacted tax rate for 2018 is 20%.

Required:
1. Assuming no differences between accounting income and taxable income other than those described above, prepare the appropriate journal entry to record Case’s 2018 income taxes.
2. What is Case’s 2018 net income?

Answer 1

Solution 1:

Case Development
Computation of Deferred Tax Liability at December 31, 2018
Year	Reversal of temporary differences - Installment income	Tax Rate	Deferred Tax Liability
2019	$40,000.00	20%	$8,000.00
2020	$150,000.00	30%	$45,000.00
2021	$50,000.00	30%	$15,000.00
Total	$240,000.00		$68,000.00

Case Development
Computation of Taxable income and income tax for 2018
Particulars	Amount
Pretax financial Income	$402,000.00
Permanent differences:
Interest revenue on municipal bonds	-$12,000.00
Temorary differences:
Less: Installment income	-$240,000.00
Taxable Income	$150,000.00
Income tax (20%)	$30,000.00

Case Development
Journal Entries
Date	Particulars	Debit	Credit
31-Dec-18	Income tax expense Dr	$98,000.00
	To Income Tax Payable		$30,000.00
	To Deferred tax liability		$68,000.00
	(Being current income tax and deferred taxes)

Solution 2:

Cast's 2018 net income = Pretax income - Income tax expense = $402,000 - $98,000 = $304,000