Question

Isaac Inc. began operations in January 2018. For certain of its property sales, Isaac recognizes income in the period of sale for financial reporting purposes. However, for income tax purposes, Isaac recognizes income when it collects cash from the buyer's installment payments. In 2018, Isaac had $685 million in sales of this type. Scheduled collections for these sales are as follows: 2018 2019 2020 2021 2022 $ 78 million 134 million 134 million 168 million 171 million $685 million Assume that Isaac has a 26% income tax rate and that there were no other differences in income for financial statement and tax purposes. Ignoring operating expenses and additional sales in 2019, what deferred tax liability would Isaac report in its year-end 2019 balance sheet? (Round your answer to the nearest whole million.) Multiple Choice $178 million

Answer 1

Deferred tax liability is recognized when book profit is higher than the income tax profit. Here in 2019 , Isaac Inc. would have recognized collection of 2018 & 2019 as income for income tax purpose but sales of $ 685 million is already recognized as income in year 2018. Therefore there should be deferred tax liability be recognized in 2019 year end for cash collections to be made in year 2020, 2021 and 2022.

Total cash collections for year 2020, 2021 and 2022 amount to million $ 473 (million $ 134 + 168 + 171) which means there is million $ 473 as deferred income

Income tax rate is 26%

Deferred tax liability = Deferred income * Income tax rate

= Million $ 473 * 26%

= $ 123 million

Isac Inc. should report deferred tax liability of $ 123 million in its year end 2019 Balancesheet.

Answer 2

The income tax rate is 26%.