Question

Case Development began operations in December 2018. 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. 2018 installment income was $680,000 and will be collected over the next three years. Scheduled collections and enacted tax rates for 2019–2021 are as follows:

2019	$	166,000	30	%
2020		290,000	40
2021		224,000	40

Case also had product warranty costs of $88,000 expensed for financial reporting purposes in 2018. For tax purposes, only the $24,000 of warranty costs actually paid in 2018 was deducted. The remaining $64,000 will be deducted for tax purposes when paid over the next three years as follows:

2019	$	21,600	30	%
2020		26,600	40
2021		15,800	40

Pretax accounting income for 2018 was $930,000, which includes interest revenue of $18,000 from municipal bonds. The enacted tax rate for 2018 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 2018 income taxes.
2. What is Case’s 2018 net income?

Answer 1

Journal Entry- Case Development
Account Tittle	Debit	Credit
Tax Expense	$325,000.00
Deferred Tax Liability		$255,400.00
Taxes Payable ( 232000*30%)		$69,600.00

Computation of Income statement
Pre Tax Accounting Income		$930,000.00
Less: Tax Expense		-$325,000.00
Net Income		$605,000.00

Working Note-1: Computation of Taxable Income
Pre Tax Accounting Income	$930,000.00
Less: Permanent Difference	$18,000.00
Pre Tax Income subject to tax	$912,000.00
Less: Installment Income	$680,000.00
Taxable Income	$232,000.00

Working Note-2: Computation of Deferred tax Liability
2019	$166,000.00	30%	$49,800.00
2020	$290,000.00	40%	$116,000.00
2021	$224,000.00	40%	$89,600.00
			$255,400.00