Question

Dixon Development began operations in December 2018. 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 2018 for lots sold this way was $30 million, which will be collected over the next three years. Scheduled collections for 2019-2021 are as follows: 2019 2020 2021 $ 8 million 14 million 8 million $ 30 million Pretax accounting income for 2018 was $38 million. The enacted tax rate is 45%. 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 2018. 2. Suppose a new tax law, revising the tax rate from 45% to 40%, beginning in 2020, is enacted in 2019, when pretax accounting income was $34 million. No 2019 lot sales qualified for the special tax treatment. Prepare the appropriate journal entry to record income taxes in 2019. 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 2019? Complete this question by entering your answers in the tabs below. Required 1 Required 2 Required 3 Assuming no differences between accounting income and taxable income other than those described above, prepare the journal entry to record income taxes in 2018. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field. Enter your answers in millions rounded to 1 decimal place (i.e., 5,500,000 should be entered as 5.5).)

Answer 1

Please find below calculation of tax and deferred tax liability for year 2018 & 2019: Based on this table, journal entries follows:

Description	Ref	Amount ($)
Year 2018
Pretax income as per books	A	$              38,000,000
Less: Income not considered for tax purpose in year 2018 (i.e.) For tax purpose, income gets reported only when collected; this way book income would have been more and hence has to be reduced to arrive at taxable income	B	$              30,000,000
Pretax income as per Income Tax	C=A-B	$                8,000,000
Tax @ 45% on income as per Income tax	D = C*45%	$                3,600,000
Tax @ 45% on income as per books	E=A*45%	$              17,100,000
Deferred Tax Liability in books for year 2018	E-D	$              13,500,000
Year 2019:
Pretax income as per books	F	$              34,000,000
Add: Income collected in year 2019 but not recorded in books in year 2019, as the same been reported in year 2018 itself as per book income	G	$                8,000,000
Pretax income as per Income Tax	H=F-G	$              42,000,000
Tax @ 40% on Income as per income tax	I = H*40%	$              16,800,000
Tax @ 40% on income as per books	J=F*40%	$              13,600,000
Deferred Tax Liability to be reversed in books for year 2019 pertains to difference in income	J-I	$              (3,200,000)
Deferred Tax Liability to be reversed in books for year 2019 pertains to difference in income tax rate	K+L	$              (1,500,000)
Total Deferred Tax Liability reversal in year 2019	(J-I)+(K+L)	$              (4,700,000)
Deferred Tax Liability (DTL) Schedule for year ended 2019
Opening Balance in DTL account (i.e) c/f from year 2018	E-D	$              13,500,000
Less: Deferred tax liability reversed in year 2019	J-I	$                3,200,000
Less: Difference due to change in tax rate (14Mn+8Mn)*45% less(14Mn+8Mn)*40%	K	$                1,100,000
Less: Difference in tax rate for income collected in year 2019 ($8Mn*45% less $8Mn*40%)	L	$                    400,000
Closing Balance in DTL Account as of year end 2019	(E-D)-(J-I)-K-L	$                8,800,000

Required 1: Journal Entry in Year 2018:

Dr. Income Tax Expense 17,100,000

Cr. Income Tax Payable 3,600,000

Cr. Deferred Tax Liability 13,500,000

(Being income tax payable for current year and deferred tax liability are accounted for year 2018)

Required 2: Journal Entry in Year 2019:

Dr. Income Tax Expense 13,600,000

Dr. Deferred Tax Liability     3,200,000

Cr. Income Tax Payable 16,800,000

(Being income tax payable for current year and reduction in balance of Deferred Tax Liability accounted for year 2019:

Dr. Deferred Tax Liability 1,500,000

Cr. DTL P&L A/c 1,500,000

(Being difference in DTL balance due to change in tax rate accounted)

Required 3: Balance in Deferred Tax Liability (DTL) account as of year ending 2019:

As per table presented above, balance in DTL account as of year end 2019 = $ 8,800,000 which is equal to 2019 applicable tax rate on income yet to collect and not reported in tax form (i.e.) ($ 14Mn + $ 8Mn) * 40% = $ 8,800,000