Question

Problem 16-3 (Algo) Change in tax rate; single temporary difference (L016-2, 16-6] 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 $10 million, which will be collected over the next three years. Scheduled collections for 2022–2024 are as follows: 2022 2023 2024 $ 4 million 4 million 2 million $ 10 million Pretax accounting income for 2021 was $15 million. The enacted tax rate is 30%. 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 30% to 25%, beginning in 2023, is enacted in 2022, when pretax accounting income was $12 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

1.

Pretax accounting income	15 million
Deduct: Sales revenue from lot sales	(10 million)
Less: Collection from lot sales	0
Taxable income	5 million

Journal entry-

Tax expense	4.50 million
Deferred tax liability (10 millions*30%)		3.0 million
Taxes payable (5 millions*30%)		1.5 million

2.

Pretax accounting income	12 million
Deduct: Sales revenue from lot sales	0
Less: Collection from lot sales	4 million
Taxable income	16 million

Future taxable amount = 4 + 2 = 6 millions

Deferred tax liability = 6 millions * 25% = 1.5 millions

Ending balance	1.5
Less: Beginning balance	(3.0)
Change needed to achieve the desired balance	1,5

Journal entry-

Tax expense	3.3 million
Deferred tax liability	1.5million
Taxes payable (16 million*30%)		4.8 million

3.

Future taxable amount	6
Previous tax rate	30%
Deferred tax liability	1.8