Question

Background

Gallo Light began operations in 2021. The company sometimes sells used warehouses on an installment basis. For these installment sales, Gallo follows GAAP when preparing its financial statements. GAAP is accrual basis and says all of the installment sale income should be recorded at the time of the sale, even if cash has not been collected from the customer.

In its income tax return, however, Gallo follows IRS tax rules. In this area, IRS rules are cash basis and say installment sale income should be recorded only when the customer has paid.

Sales and collections

Total installment sales for 2021 were $120,000. The cash related to these sales was collected from the customer as follows: $80,000 in 2022 and $40,000 in 2023

Tax rates

The tax rates in each were: 25% in 2021, 25% in 2022, and 30% in 2023.

Pretax accounting income

Excluding the installment sales discussed above, the company's pretax accounting (GAAP) income was: $710,000 in 2021, $710,000 in 2022, and $710,000 in 2023.

Required: Prepare the appropriate journal entries to record Gallo Light's 2021, 2022, and 2023 income taxes. Show your calculations.

Answer 1

Answer :

Gallo Light

Year		2021	2022	2023
Pretax income	-	710000	710000	710000
Add :	-	-	-	-
Sales as per IRS rules			80000	40000
Sales as per IRS rules	-	710000	790000	750000
Tax @25%		177500	197500	187500

Journal Entries

(1) For year 2021

Profit and loss	177500	-
To Tax payable		177500

(2). For year 2022

Profit and loss	197500	-
To Tax payable		197500

(3). For year 2023

Profit and loss	187500	-
ToTax payable		187500