Question

Case Development began operations in December 2013. 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. 2013 installment income was $600,000 and will be collected over the next three years. Scheduled collections and enacted tax rates for 2014–2016 are as follows:

          

2014	$	130,000			20	%
2015		330,000			30
2016		140,000			30

           

Pretax accounting income for 2013 was $780,000, which includes interest revenue of $30,000 from municipal bonds. The enacted tax rate for 2013 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 2013 income taxes. (If no entry is required for an event, select "No journal entry required" in the first account field.)

     

      

2.	What is Case’s 2013 net income?

     

  

3.	How should the deferred tax amount be classified in a classified balance sheet?
	Current Liabilities ( Amount) Long-term Liabilities (Amount)

     

Answer 1

Part 1-

it has been assumed that there is no difference in the accounting and taxable income other than what is mentioned above. The appropriate journal entry would be-

Pretax Accounting Income (Given)	$ 810,000
Less: Municipal Bond Interest (Fixed)	($ 10,000)
= Pretax Accounting Income	$ 800,000
Less: Income from installments	($ 600,000)
Taxable Income	$ 200,000

$Tax Liability (Deferred) = (30/100*150,000)+(40/100*250,000)+(40/100*200,000)= $ 225,000$

The Journal Entry would be as follows

Particulars	Debit	Credit
Tax Expense	$ 285,000
Deferred Tax Liability		$ 225,000
Taxes Payable		$ 60,000

Part 2-

The Net Income is computed as follows-

Pretax Accounting Income	$ 810,000
Less: Tax Expense	($ 285,000)
= Net Income	$ 525,000

Part 3-

The Deferred Tax Liability will be shown in Balance Sheet as follows-

Current Assets : $ 150,000 as Investment Receivable (in 2014)

Current Liabilities: (30% of 150,000) = $ 45,000 as Deferred Tax Liability

Non-Current Assets: $ 250,000 and $ 200,000 as Investment Receivable (in 2015 and 2016)

Non-current Liabilities: (40% of 250,000 + 200,000) = $ 180,000 as Deferred Tax Liability