Question

Dixon Development began operations in December 2021. When lots for industrial development are sold, Dixon recognizes income for financial reporting purposes in the year of the sale. For some lots, Dixon recognizes income for tax purposes when collected. Income recognized for financial reporting purposes in 2021 for lots sold this way was $16 million, which will be collected over the next three years. Scheduled collections for 2022-2024 are as follows: 2022 2023 2024 $ 8 million 6 million 2 million $ 16 million Pretax accounting income for 2021 was $24 million. The enacted tax rate is 35%. Required: 1. Assuming no differences between accounting income and taxable income other than those described above, prepare the journal entry to record income taxes in 2021. 2. Suppose a new tax law, revising the tax rate from 35% to 30%, beginning in 2023, is enacted in 2022, when pretax accounting income was $18 million. No 2022 lot sales qualified for the special tax treatment. Prepare the appropriate journal entry to record income taxes in 2022. 3. If the new tax rate had not been enacted, what would have been the appropriate balance in the deferred tax liability account at the end of 2022?

Answer 1

Solution:

1)

Particulars	Amount
Pretax accounting income	$24,000,000
Deduct: Sales revenue fromlot sales	($16,000,000)
Add: Collections from lot sales	$0
Taxable income	$8,000,000

Journal entry:

No	Account title	Debit	Credit
1	Tax expense	$8,400,000
	To deferred tax liability (16,000,000*35%)		$5,600,000
	To taxes payable (8,000,000*35%)		$2,800,000

2)

Particulars	Amount
Pretax accounting income	$18,000,000
Deduct: Sales revenue fromlot sales	$0
Add: Collections from lot sales	$8,000,000
Taxable income	$26,000,000

Journal entry:

No	Account title	Debit	Credit
1	Tax expense	$5,900,000
	To deferred tax liability	$3,200,000
	To taxes payable ($26,000,000*35%)		$9,100,000

Working:

Future taxable amount =$6,000,000+$2,000,000

=$8,000,000

Deferred tax liability =$8,000,000*30%

=$2,400,000

Ending balance	$2,400,000
Less: beginning balance	($5,600,000)
Change needed to achieve desired balance	$3,200,000

3)

Future taxable amount	$8,000,000
Previous tax rate	35%
Deferred tax liability	$2,800,000

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