Question

Alsup Consulting sometimes performs services for which it receives payment at the conclusion of the engagement, up to six months after services commence. Alsup recognizes service revenue for financial reporting purposes when the services are performed. For tax purposes, revenue is reported when fees are collected. Service revenue, collections, and pretax accounting income for 2015–2018 are as follows:

  

	Service Revenue			Collections			Pretax Accounting Income
2015	$	602,000		$	572,000		$	130,000
2016		690,000			700,000			195,000
2017		655,000			625,000			165,000
2018		640,000			660,000			145,000

  

There are no differences between accounting income and taxable income other than the temporary difference described above. The enacted tax rate for each year is 40%.

(Hint: You may find it helpful to prepare a schedule that shows the balances in service revenue receivable at December 31, 2015–2018.)

Required:

1.	Prepare the appropriate journal entry to record Alsup's 2016 income taxes, Alsup’s 2017 income taxes and Alsup’s 2018 income taxes. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in thousands.)

View transaction list View journal entry worksheet No Event General Journal Debit Credit Income tax expense Deferred tax liability Income tax payable 2 Income tax expense Deferred tax liability Income tax payable 3 Income tax expense Deferred tax liability Income tax payable

Answer 1

Solution:

Computation of Taxable Income and Tax Payable - Alsup Consulting
Particulars	2016	2017	2018
Pre tax accounting income	$1,95,000.00	$1,65,000.00	$1,45,000.00
Add: Service revenue collection	$7,00,000.00	$6,25,000.00	$6,60,000.00
Less: service revenue as per books	$6,90,000.00	$6,55,000.00	$6,40,000.00
Taxable income	$2,05,000.00	$1,35,000.00	$1,65,000.00
Income Tax (40%)	$82,000.00	$54,000.00	$66,000.00

Computation of Temporary differences - Alsup Consulting
Particulars	2015	2016	2017	2018
Beginning service revenue receivables	$0.00	$30,000.00	$20,000.00	$50,000.00
Service Revenue	$6,02,000.00	$6,90,000.00	$6,55,000.00	$6,40,000.00
Collection	$5,72,000.00	$7,00,000.00	$6,25,000.00	$6,60,000.00
ending service revenue receivables	$30,000.00	$20,000.00	$50,000.00	$30,000.00
Taxable (Deductible Temporary differences)	$30,000.00	-$10,000.00	$30,000.00	-$20,000.00
Deferred tax liability (reversal) for the year	$12,000.00	-$4,000.00	$12,000.00	-$8,000.00

Journal Entries - Alsup Consulting
Date	Particulars	Debit (In '000)	Credit (In '000)
31-Dec-16	Income tax expense Dr	$78.00
	Deferred tax liability Dr	$4.00
	To Income tax payable		$82.00
	(To record income tax and deferred taxes)
31-Dec-17	Income tax expense Dr	$66.00
	To Income tax payable		$54.00
	To Deferred tax liability		$12.00
	(To record income tax and deferred taxes)
31-Dec-18	Income tax expense Dr	$58.00
	Deferred tax liability Dr	$8.00
	To Income tax payable		$66.00
	(To record income tax and deferred taxes)