Question

Case Development began operations in December 2018. 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. 2018 installment income was $610,000 and will be collected over the next three years. Scheduled collections and enacted tax rates for 2019-2021 are as follows: 2019 $152,000 3e% 2020 255,00e 40 2021 203,000 40 Case also had product warranty costs of $81,000 expensed for financial reporting purposes in 2018. For tax purposes, only the $20,500 of warranty costs actually paid in 2018 was deducted. The remaining $60,500 will be deducted for tax purposes when paid over the next three years as follows: 2019 $20,200 30% 2020 25,200 40 2021 15,100 40 Pretax accounting income for 2018 was $825,000, which includes interest revenue of $11,000 from municipal bonds. The enacted tax rate for 2018 is 30% 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 2018 income taxes. 2. What is Case's 2018 net income?

Answer 1

	Assuming that no difference between taxabl income and accounting income other than those described above
	Pretax accounting income(given)	825000
	Deduct: Permanent difference- municipal bond interest	-11000
	Pretax accounting subject to tax	814000
	Temporary difference:
	Installment income (taxable when collected)	-610000
	Warranty Costs to be incurred in future	60500
	Taxable income	264500
	Differed tax liability
	(152,000 x 30 %) + (255,000 x 40%) + (203000 x 40%)	228800
	Deferred tax Asset
	(20,200 x 30 %) + (25,200 x 40%) + (15,100 x 40%)	22180
	Net Deffered tax Liability	206620
1	General Journal	Debit	Credit
	Income tax Expense	285970
	Deferred tax Liability		206620
	Income tax Payable		79350
	(Being tax expense recognised)
2	Pre tax accounting income	825000
	less: Tax expense	-285970
	Net income	539030