Question

Case Development began operations in December 2021. 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. 2021 installment income was $852,000 and will be collected over the next three years. Scheduled collections and enacted tax rates for 2022–2024 are as follows:

2022	$	280,000	20	%
2023		316,000	25
2024		256,000	25

Case also had product warranty costs of $318,000 expensed for financial reporting purposes in 2021. For tax purposes, only the $76,000 of warranty costs actually paid in 2021 was deducted. The remaining $242,000 will be deducted for tax purposes when paid over the next three years as follows:

2022	$	90,000
2023		80,000
2024		72,000

Pretax accounting income for 2021 was $994,000, which includes interest revenue of $24,000 from municipal bonds. The enacted tax rate for 2021 is 20%.

Required:
1. Assuming no differences between accounting income and taxable income other than those described above, prepare the appropriate journal entry to record Case’s 2021 income taxes.
2. What is Case’s 2021 net income?

Answer 1

А B C D E F G H 1 1) Particulars a AwN Current year I 2021 Future taxable (Deductible) Amount ($) 2022 2023 Deferred Tax 2024 Liab. Asset 994000 -24000 -852000 280000 0.2] 56000 316000 0.25 79000 256000 0.25 64000 199000 6 Pretax accounting income 7 Permanent difference 8 Temporary difference: 9 Installment sales 10 11 Deferred tax liability 12 13 Warranty expense 14 15 Deferred tax 16 Taxable income (tax return) 17 Enacted tax rate 18 Tax payable currently 19 20 21 22 Ending balances (balance currently needed): 23 Less: beginning balance: 24 Change need to achive desired balances 242000 -90000 -80000 -72000 0.2 0.25 0.25 -18000 -20000 -18000 56000 360000 0.2 72000 TILL Deferred Tax Liab. Asset 199000 56000 olol 199000 56000

Credit ($) Debit ($) 215000 56000 199000 72000 26 Journal entry at the end of 2021 27 Date Particular Income tax expense (to balance) Deferred tax asset (determined above) Deferred tax liability (determined above) 31 Income tax payable (determined above) 32 33 34 2) Particulars 35 Pretax income Income tax expense Net income Amount ($) 994000 -215000 779000 36