Question

Exercise 16-29 (Algo) Multiple differences; multiple tax rates [LO16-2, 16-3, 16-5, 16-6]

Case Development began operations in December 2021. 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. 2021 installment income was $672,000 and will be collected over the next three years. Scheduled collections and enacted tax rates for 2022–2024 are as follows:

2022	$	180,000	20	%
2023		276,000	25
2024		216,000	25

Case also had product warranty costs of $148,000 expensed for financial reporting purposes in 2021. For tax purposes, only the $36,000 of warranty costs actually paid in 2021 was deducted. The remaining $112,000 will be deducted for tax purposes when paid over the next three years as follows:

2022	$	40,000
2023		40,000
2024		32,000

Pretax accounting income for 2021 was $874,000, which includes interest revenue of $14,000 from municipal bonds. The enacted tax rate for 2021 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 2021 income taxes.
2. What is Case’s 2021 net income?

Answer 1

solution o - computation of taxable income and income tar for 2021 - particulars in lamount & pore tax financial income 874000 ' permanent differences Interest devenue on muncipal bonds | (14000) Temporazy differences Add; warranty expense To books 112 000 higher than as per tax less: Installment Por come (672000) Taxable income 300000 Income tax (20%) $ 60000 computation of deffered for tability at Dec 31;2021 year Amount 18000 2023 276 000 2024), 216 000 Total 672000 Jare rate hoeffered torx liability 20% 36000 69000 25% 54000 159000 computation of deffered tood assets at Dec 31, 2021 I Amount 2022 ton rates Deffered to 20% 8000 10000 8000 40000 40000 3) 000 112000 2013 200 Total 1 26000

case Development Journal entries Debit 6 ) credit & s Date particulars Sl-Dec-21 193000 26000 Income tase expense Defferred tax Assets To income fork payable To deferred tox pratility 60000 159000 (Being current incometase and deferred taxes) 6 Net income for 2021 = pretax income -Income tax expense = 874000-193000 = $ 681000