Question

The DeVille Company reported pretax accounting income on its income statement as follows: 2021 2022 2023 2024 $360,000 280,000 350,000 390,000 Included in the income of 2021 was an installment sale of property in the amount of $32,000. However, for tax purposes, DeVille reported the income in the year cash was collected. Cash collected on the installment sale was $12,800 in 2022, $16,000 in 2023, and $3,200 in 2024. Included in the 2023 income was $11,000 interest from investments in municipal governmental bonds. The enacted tax rate for 2021 and 2022 was 40%, but during 2022, new tax legislation was passed reducing the tax rate to 25% for the years 2023 and beyond. Required: Prepare the year-end journal entries to record income taxes for the years 2021–2024. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Solution:

Computation of Taxable Income and Income Tax Payable
Particulars	2021	2022	2023	2024
Pretax accounting income	$360,000.00	$280,000.00	$350,000.00	$390,000.00
Less: Income from installment sale property	-$32,000.00	$0.00	$0.00	$0.00
Add: Collection of installment sales	$0.00	$12,800.00	$16,000.00	$3,200.00
Less: Interest on municipal bonds	$0.00	$0.00	-$11,000.00	$0.00
Taxable Income	$328,000.00	$292,800.00	$355,000.00	$393,200.00
Income Tax Payable	$131,200.00	$117,120.00	$88,750.00	$98,300.00

Computation of Deferred Tax
Particulars	2021	2022	2023	2024
Collection of installment sale as per tax return	$0.00	$12,800.00	$16,000.00	$3,200.00
Income from installment sales as per books	$32,000.00	$0.00	$0.00	$0.00
Taxable Temporary differences	$32,000.00	$0.00	$0.00	$0.00
Reversible Temporary differences		-$12,800.00	-$16,000.00	-$3,200.00
Deferred tax liability	$12,800.00
Reversal of Deferred tax liability 2022 = ($12,800*40% + $19,200*15%) 2023 - $16,000*25% 2024 - $3,200*25%		$8,000.00	$4,000.00	$800.00

Journal Entries - Deville Company
Year	Particulars	Debit	Credit
2021	Income Tax Expense Dr	$144,000.00
	To Income tax Payable		$131,200.00
	To Deferred tax liability		$12,800.00
	(To record income tax and deferred tax for 2021)
2022	Income Tax Expense Dr	$109,120.00
	Deferred tax liability Dr	$8,000.00
	To Income tax Payable		$117,120.00
	(To record income tax and deferred tax for 2022)
2023	Income Tax Expense Dr	$84,750.00
	Deferred tax liability Dr	$4,000.00
	To Income tax Payable		$88,750.00
	(To record income tax and deferred tax for 2023)
2024	Income Tax Expense Dr	$97,500.00
	Deferred tax liability Dr	$800.00
	To Income tax Payable		$98,300.00
	(To record income tax and deferred tax for 2024)