Question

Exercise 16-26 Multiple differences; multiple tax rates; balance sheet classification [LO16-1, 16-2, 16-4, 16-5, 16-6, 16-8]

Case Development began operations in December 2016. 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. 2016 installment income was $640,000 and will be collected over the next three years. Scheduled collections and enacted tax rates for 2017–2019 are as follows

   

2017	$	158,000	30	%
2018		270,000	40
2019		212,000	40

   

Case also had product warranty costs of $84,000 expensed for financial reporting purposes in 2016. For tax purposes, only the $22,000 of warranty costs actually paid in 2016 was deducted. The remaining $62,000 will be deducted for tax purposes when paid over the next three years as follows:

   

2017	$	20,800	30	%
2018		25,800	40
2019		15,400	40

   

Pretax accounting income for 2016 was $870,000, which includes interest revenue of $14,000 from municipal bonds. The enacted tax rate for 2016 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 2016 income taxes. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in thousands and round your answers to 2 decimal places.)

     

2.	What is Case’s 2016 net income? (Enter your answer in thousands and round your answer to 2 decimal places.)

     

3.	How should the deferred tax amounts be classified in a classified balance sheet? (Enter your answers in thousands and round your answers to 2 decimal places.)

     

Answer 1

1.

Pretax accounting income $870,000

Less : Permanent difference - revenue from municipal bonds $14,000

Pretax accounting income subject to tax $856,000

Temporary difference - Less : Installment income $640,000

Temporary difference - Add : Warranty cost $62,000

Taxable income $278,000

Tax payable = 30%*278,000 = $83,400

Deferred tax liability = 158,000*30% + 270,000*40% + 212,000*40% = 240,200

Deferred tax asset = 20,800*30% + 25,800*40% + 15,400*40% = 22,720

Journal entry :

Income tax expense $300,880

Deferred tax asset $22,720

Deferred tax liability $240,200

Income tax payable $83,400

2.

Net income = Pre tax income - tax expense = 870,000 - 300,880 = $569,120

3.

Classification of deferred tax amount

Current liability = 158,000*30% = $47,400

Long-term liability = 270,000*40% + 212,000*40% = $192,800