Question

Buffalo Sabres Corp began operations in 2017. Included in their 2017 financial statements were bad debt expenses of $1,400,000 and profit from an installment note of $2,600,000. For tax purposes, the bad debts will be deducted currently and the profit from the installment sale will be recognized in 2018. The enacted tax rates are 30% for 2017 and 25% for 2018. In its income statement, what amount would Sabres Corp report as deferred income tax expense?

Answer 1

"For tax purposes, the bad debts will be deducted currently and the profit from the installment sale will be recognized in 2018"

It means that company had deducted bad debts and added profit from the installment sale in 2017 financial statement income, however, both items can only be reported on tax return in 2018.

Thus, exclude these two items from the tax return and the tax is also deferred for both!

Bad debt expense is a deferred asset so 1400000*.25=350000

installment sale is a deferred liability so 2600000*.25=(650000)

Deferred income tax expense=650000-350000=$300000