Question

Karma Company reports pretax financial income of $300,000 in each of the years 2016, 2017, and 2018. The company is subject to a 20% tax rate, and has the following differences between pretax financial income and taxable income: a. An installment sale of $48,000 in 2016 is reported for tax purposes over a 2­year period at a constant amount per month beginning July 1, 2016. The entire sale is recognized for book purposes in 2018. b. Interest received by the company on state and municipal bonds is $3,000 in 2017 and 2018. This is not recognized as revenue for tax purposes, but is recognized for book purposes. Instructions Prepare the necessary calculations and make the journal entries to record income taxes for Karma Company for 2016, 2017, and 2018.

Answer 1

Solution:

	2016	2017	2018
Pretax financial income	300,000	300,000	300,000
Permanent difference
Unrecognized revenue		-3,000	-3,000
Temporary difference
Installment sale	-36,000	24,000	12,000
Taxable income	264,000	321,000	309,000
Tax rate	20%	20%	20%
Income taxes payable	52,800	64,200	61,800

Date	Particulars	Debit	Credit
Dec-31-2016	Income Tax Expense ($52,800 + $7,200)	60,000
	Income Taxes Payable ($264,000 × 20%)		52,800
	Deferred Tax Liability ($36,000 × 20%)		7,200
Dec-31-2017	Income Tax Expense ($64,200 - $4,800))	59,400
	Income Taxes Payable ($24,000 × 20%)	4,800
	Deferred Tax Liability ($321,000 × 20%)		64,200
Dec-31-2018	Income Tax Expense ($61,800 - $2,400)	59,400
	Income Taxes Payable ($12,000 × 20%)	2,400
	Deferred Tax Liability ($309,000 × 20%)		61,800