Question

Patterson Development sometimes sells property on an installment basis. In those cases, Patterson reports income in its income statement in the year of the sale but reports installment income by the installment method on the tax return. Installment income in 2021 was $290 million, which Patterson expects to collect equally over the next four years. The tax rate is 25%, but based on an enacted law, is scheduled to become 35% in 2023.

Patterson’s pretax accounting income for the 2021 income statement was $700 million. Of this amount, $64 million is non-taxable revenue from proceeds of a life insurance policy. There were no differences between accounting income and taxable income other than those described above and no cumulative temporary differences existed at the beginning of the year.

Required:

1. Prepare the appropriate journal entry to record Patterson’s 2021 income taxes.

2. What is Patterson’s 2021 net income?

Answer 1

Working notes Current year 2021 Future Taxable Amount 2023 2024 2022 2025 $700 (64) $ in million Pretax accounting income Permanent difference Proceeds of life insurance policy Temporary difference Installment Income Taxable income tax return) Enacted tax rate Tax payable (290) 72.5 72.5 72.5 72.5 290 $346 25% $86.50 25% 18.13 35% 25.38 35% 25.38 35% 20.38 25.38 94 27 Credit Debit 180.77 $ Journal Entry Date Accounts and Explanation December 31, 2021 Income tax expense Deferred tax liability Income tax payable To record income tax payable $ 94.27 86.51 Patterson Development Income Statement For the year ended Dec 31,2021 Income before taxes $700,000,000 Income tax expenses 180,770,000 Net income 519,230,000