Question

Gallo Light began operations in 2021. The company sometimes sells used warehouses on an installment basis. In those cases, Gallo Light reports income in its income statement in the year of the sale. In its income tax return, though, Gallo Light reports installment income by the installment method. Installment income in 2021 was $570,000, which Gallo Light expects to collect equally over the next three years. The tax rate is 25%, but based on an enacted law, is scheduled to become 30% in 2023.

Gallo Light's pretax accounting income from the 2021 income statement was $824,000, which includes $34,000 of interest revenue from an investment in municipal bonds. There were no differences between accounting income and taxable income other than those described above.

Required:

1. Prepare the appropriate journal entry to record Gallo Light's 2021 income taxes. Show calculations.

2. What is Gallo Light's 2021 net income?

(For both requirements, round your answers to 2 decimal place.)

Answer 1

Explanation :

Note 1 :

	Current year		Future taxable amounts		( $ in 000s)
	2021	2022	2023	2024
Accounting income	$ 824
less: Permanent difference	( $ 34 )
Temporary difference :
less: installments sales	( $570 )	$ 190	$ 190	$ 190
Taxable income	$ 220
Enacted tax rate	25%	25%	30%	30%
Tax payable currently	$ 55   {$220 *25 %}
Deferred tax liability		$ 47.5 {190*25%}	$ 57 {190*30%}	$ 57 {190*30%}	$ 161.50
Less: Beginning balance					$ 0
Change in balance : credit (debit )					$ 161.50

Required 1 ;
Year	General journal	Debit	Credit
2021	Income tax expense {$161.50+ $55 }	$ 216.50
	Deferred tax liability ( see note 1 )		$ 161.50
	Income tax payable (see note 1 )		$ 55
	( To record Gallo lights income tax for 2021 )

Required 2 :
	( $ in 000s)
Particulars	Amounts ($)
Pre accounting income	$ 824
less: Income tax expense	($216.50 )
Net income	$ 607.50