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 $86,400, which Gallo Light expects to collect equally over the next three years. The tax rate is 30%, but based on an enacted law, is scheduled to become 35% in 2020. Gallo Light's pretax accounting income from the 2018 income statement was $824,000, which includes $34,000 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. 2. What is Gallo Light's 2018 net income?

Answer 1

Solution:

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

Particulars	Debit($)	Credit($)
Income tax expense A/c Dr	$239,880
To Deferred tax liability A/c		$28,800
To Income tax payable A/c		$211,080

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

Details	Amount($)
Pretax accounting income	$824,000
Income tax expense	($239,880)
Net income	$584,120

Working notes:

Details	2018	2019	2020	2021
Accounting income	$824,000
Permanent difference	($34,000)
Temporary difference
Installment sales	($86,400)	$28,800	$28,800	$28,800
Taxable income	$703,600
Enacted tax rate	30%	30%	35%	35%
Currently tax payable	$211,080
Deferred tax liability		$8,640	$10,080	$10,080	$28,800