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 $906,000 and will be collected over the next three years. Scheduled collections and enacted tax rates for 2022-2024 are as follows: 2022 2023 2024 $310, Bee 328, eee 268, eee 20% 25 25 Case also had product warranty costs of $369.000 expensed for financial reporting purposes in 2021. For tax purposes only the $88.000 of warranty costs actually paid in 2021 was deducted. The remaining $281,000 will be deducted for tax purposes when paid over the next three years as follows: 2022 $105,800 2023 92,eee 2024 84, eee Pretax accounting Income for 2021 was $1.027.000, which includes Interest revenue of $27.000 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

Part (1) Journal entry to record Case's 2021 income taxes: Date Credit 1 General Journal Account Title Debit Income tax expense $221,000 Deferred tax asset $65,000 Deferred tax liability Income tax payable $211,000 $75,000 Note: Particulars 2021 a Pretax accounting income $1,027,000 b Less: Permanent difference-municipal bond interest $27,000 c Pretax accounting income after adjusting permanent differences $1,000,000 dTemporary difference: e Less: Installment income (taxable when collected) $906,000 f Add: Warranty costs disallowed $369.000 Less: Warranty costs actually paid in current year $88.000 h Taxable income = c-e+f-g $375,000 i| Tax payable = $375,000*20% = $75,000

Particulars 2022 2023 2024 Total a Installment income collected during the year $310.000 $328,000 $268.000 b Applicable tax rate for the year 20% 25% 25% cDeferred tax liability = a*b $62,000 $82.000 $67,000 $211,000 Particulars a Warranty costs actually paid during the year b Applicable tax rate for the year c Deferred tax asset = a*b 2022 2023 2024 Total $105,000 $92,000 $84.000 20% 25% 25% $21,000 $23,000 $21,000 $65,000 Part (ü) Particulars a Income before tax b Income tax expense C Net Income = a-b Amount $1,027,000 $221,000 $806,000 So net Case's net income for 2021 is $806,000 Note: Particulars Amount a Income tax payable $75,000 b Deferred tax asset $65.000 cDeferred tax liability $211,000 d Income tax expense=a - b +c $221,000