Nolan Company sells its product on an installment basis, earning a $450 pretax gross profit on...
Nolan Company sells its product on an installment basis, earning a $450 pretax gross profit on each installment sale. For accounting purposes the entire $450 is recognized in the year of sale, but for income tax purposes the installment method of accounting is used. Assume Nolan makes one sale in 2016, another sale in 2017, and a third sale in 2018. In each case, onethird of the gross sales price is collected in the year of sale, onethird in the next year, and the final installment in the third year. If the tax rate is 50%, what amount of deferred tax liability should Nolan Company show on its December 31, 2018 balance sheet:
Homework Answers
Answer:
Amount of deferred tax liability of Nolan Company on its December 31, 2018 balance sheet will be on account of:
1. Gross of profit on third installment of 2017 installment sale
2. Gross profit of second and third installment of 2018 installment sale
Hence:
Deferred tax liability of Nolan Company as of December 31, 2018 = (450/ 3) *50% + (450 / 3 * 2) * 50% = $225
Deferred tax liability of Nolan Company as of December 31, 2018 = $225
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