Question

Tru Developers, Inc., sells plots of land for industrial development. Tru recognizes income for financial reporting purposes in the year it sells the plots. For some of the plots sold this year, Tru took the position that it could recognize the income for tax purposes when the installments are collected. Income that Tru recognized for financial reporting purposes in 2021 for plots in this category was $60 million. The company expected to collect 60% of each sale in 2022 and 40% in 2023. This amount over the next two years is as follows: 2022 2023 $ 36 million 24 million $ 60 million Tru's pretax accounting income for 2021 was $88 million. In its income statement, Tru reported interest income of $16 million, unrelated to the land sales, for which the company's position is that the interest is not taxable. Accordingly, the interest was not reported on the tax return. There are no differences between accounting income and taxable income other than those described above. The enacted tax rate is 25 percent. Management believes the tax position taken on the land sales has a greater than 50% chance of being upheld based on its technical merits, but the position taken on the interest has a less than 50% chance of being upheld. It is further believed that the following likelihood percentages apply to the tax treatment of the land sales ($ in millions): Amount Qualifying for Installment Sales Treatment $ 60 50 40 Percentage Likelihood of Tax Treatment Being Sustained 20% 20% 20% 20% 20% 20

Answer 1

1) The portion of tax benefits of tax-free interest will tru recognize on its 2021 return will be the amount

Tax benefit = interest expenses*tax rate

tax benefit = $16 million*25%

Tax Benefit = $4 million

2) The portion of the tax benefit of tax-free interest will Tru recognize on its 2021 financial statement will be

In the financial statement, there will be NO tax benefit will be recognized

3) a)The portion of the tax on the $60 million income from the plots sold on an installment basis will Tru defer in its 2021 financial statements

The tax benefits from the tax treatment of the plot sales are the ability to defer paying the tax by the Tru.

Tru is reducing income by the entire $60 million effectively deferring the $60 million * 25%= $15 million

It is "more likely than not" that Tru's position would be sustained upon examination so Tru wants to determine the largest amount that has a greater than 50% likelihood of sustainability

tru will recognize $40 million*25%= $10 million

4) For passing the journal entry firstly we have to determine Deferred tax liability

on the current year

A) Accounting Income = $88 million

B) Interest Income = $16 million

C) Sale of Plot = $60 Million

Taxable income= A-B-C

i.e 88-16-60

= $12 million

Current Year Tax Payable = $12 million * 25%

= $ 3 Million

Deffered Tax Liability = (88-16)*25% - 3

= $15 million

Journal entry

Date	Particular	Debit($)	Credit$
	Income Tax Expense	18
	To Deferred Tax Liability		15
	To Income tax payable		3