Question

E 16-26 Multiple differences; multiple tax rates し016-103. L016-2 @ , LO16-4 @ LOI 6-s@ , LO16-6 @ This exercise is a variation of E 16-25modified to include a second temporary difference.) Case Development began operations in December 2018. When property is sold on an installment basis, Case recognizes installment income for financial reporting purposes in the year of the sale. For tax purposes, installment income is reported by the installment method. 2018 installment income was $600,000 and will be collected over the next three years Scheduled collections and enacted tax rates for 2019-2021 are as follows: 2019 $150,000 30% 2020 250,000 40 2021 200,000 40

Answer 1

Computation of Taxable Income & Deferred Tax Liabiity
Particulars	Amount ($)
Pretax accounting income	$8,10,000.00
Deduct: Permanent difference - municipal bond interest	-$10,000.00
Pretax accounting income subject to tax	$8,00,000.00
Temporary difference:
Installment income (taxable when collected)	-$6,00,000.00
Warranty Expense	$60,000.00
Taxable income	$2,60,000.00
Deferred Tax Liability
2019 : ( 150000-20000)*30%	$39,000.00
2020 : ( 250000-25000)*40%	$90,000.00
2021 : ( 200000-15000)*40%	$74,000.00
Total Deferred Tax Liability	$2,03,000.00

(A) Journal Entry-
Accounts title and Explanations	Debit ($)	Credit ($)
Tax expense	$2,81,000.00
Deferred tax liability		$2,03,000.00
Taxes payable ($260000 * 30%)		$78,000.00

B) Coputation of C's Net Income
Particulars	Amount ($)
Pretax accounting income	8,10,000
Less: Tax expense	-2,81,000
Net income	5,29,000