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 $70 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	$	42	million
2023		28	million
	$	70	million

Tru’s pretax accounting income for 2021 was $100 million. In its income statement, Tru reported interest income of $15 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 40 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			Percentage Likelihood of Tax Treatment Being Sustained
$	70			20	%
	60			20	%
	50			20	%
	40			20	%
	30			20	%

Required:
1. What portion of the tax benefit of tax-free interest will Tru recognize on its 2021 tax return?
2. What portion of the tax benefit of tax-free interest will Tru recognize on its 2021 financial statements?
3-a.What portion of the tax on the $70 million income from the plots sold on an installment basis will Tru defer on its 2021 tax return?
3-b. What portion of the tax on the $70 million income from the plots sold on an installment basis will Tru show as a deferred tax asset or liability in its 2021 financial statements?
4. Prepare the journal entry to record income taxes in 2021, assuming full recognition of the tax benefits in the financial statements of both differences between pretax accounting income and taxable income.
5. Prepare the journal entry to record income taxes in 2021, assuming the recognition of the tax benefits in the financial statements you indicated in requirements 1–3.
  

Reg 1 to 3 Reg 4 Reg 5 What portion of the tax benefit of tax-free interest will Tru recognize on its 2021 tax return and financial statements? What portion of the tax on the $70 million income from the plots sold on an installment basis will Tru defer on its 2021 tax return and deferred tax asset or liability in its 2021 financial statements? (Enter your answers in millions (i.e., 10,000,000 should be entered as 10).) 2 1 Tax benefit recognized Tax benefit recognized 3a Amount deferred 36 million million million million Req 1 to 3 Reg 4 >

Answer 1

	Tru developer Inc Sells Plot of Land for Industrial Development
	Tru recognised for financial reporting =2021 year
	Category $ 70 Million
	The company expect to collect 60% of each sale in 2022
	and 40% in 2023
	Year	$ Mio
	2022	42
	2023	28
		70
	Tru Pre Tax accounting Income 2021 $ 100 Mio
	Interest Income $ 15 Mio
	The enacted tax rate =40%
Answer1	What portion of the Tax benefit of Tax free Interest will Tru recognised- year 2021 - tax Return
	Interest Income $ 15 Mio
	The enacted tax rate =40%
	Tax benefit $		6
	$15 Mio *40%
Answer2	What portion of the Tax benefit of Tax free Interest will Tru recognised- year 2021 - Financial Statement
	No Tax benefit of above benefit on Financial Statement It is Not "more likely than Not"
Answer3 a
	What portion of the Tax on $ 70 Mio
	Defer Tax in 2021
	The enacted tax rate =40%
	Deferred tax $ 70 Mio*40%			28