Question

Intermediate Accounting Chapter 16: For Credit KEY NAME: PROBLEM #1: Motown Corporation enters into an installment sale with Max Corporation in 20X2. Motown recognizes the sale on an accrual basis (when sale is complete) for book purposes and on an installment sale method (cash) basis for tax purposes Facts are as follows: Initial Year of installment sale 20X2 Revenue Recognition Book Tax 180,000 $ 20X2 20x3 20X4 Tax Rate 20% 20X2 20x3 20X4 Book Income 186,755 39,427 122,400 $ 1.) Calculate taxable income for 20X2 2.) Calculate taxes payable for 20X2 3.) Determine the current deferred tax liability at 12/31/X2. Page 1 of 2

Answer 1

Main Working Note:

Year	Book Income	Adjustment for Tax	Taxable Income	Difference for DTA/DTL	Deferred Tax at Year End @ 20%	Status	Income Impact for DTA/DTL
2002	186755	-180000	6,755 (1)	180,000	36,000	DTL	36,000
2003	39427	90000	129,427 (5)	(90,000)	(18,000)	DTA	18,000
2004	122400	90000	212,400 (9)	(90,000)	(18,000) (6)	-	-

Current Tax#1	Deferred Tax #2	Total Tax Expenses
1,351 (2)	36,000 (3)	37,351 (4)
25,885	(18,000)	7,885
42,480	(18,000)	24,480

Notes:

#1: Calculated at 20% of the Taxable Income

#2: This is the column of Income Impact from the above table

Answers for all the questions:

1. Taxable Income for 2002 = 6,755

2. Tax Payable for 2002 = 1,351

3. Current Deferred Tax Liability for 2002 = 180,000 * 20% = 36,000

4. Total Income tax expense for 2002 = 37,351

5. Net Income after tax for 2002 = 186,755 - 37,351 = 149,404

6. Taxable income for 2003 = 129,427

7. At the end of 2003, there is balance of DTL of Rs. 18,000 only (90,000 payable in 2004 at 20%). There was DTL of 36,000 at 2002 end. Hence Debit DTL and Credit Income Statement of 18,000.

Option B is the answer

8. Net income after tax for 2003 = 39,427 - 7,885 = 31,542

9. Taxable income for 2004 = 212,400

10. Net income after tax for 2004 = 122,400 - 24,480 = 97,920