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 $13 million, which will be collected over the next three years. Scheduled collections for 2019-2021 are as follows: 2019 2020 $ 5 million 6 million 2 million $13 million Pretax accounting income for 2018 was $18 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 2018. 2. Suppose a new tax law, revising the tax rate from 30% to 25%, beginning in 2020, is enacted in 2019, when pretax accounting income was $14 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).) View transaction list Journal entry worksheet Record 2018 income taxes. Note: Enter debits before credits. General Journal Debit Credit Date Dec 31, 2018

Answer 1

Please find below table useful to compute desired results: -

C D к Credit A B 1 Income recognised for reporting purpose 2 Schedules collections for 2019 3 Schedules collections for 2020 4 Schedules collections for 2021 5 Pretax Accounting income for 2018 6 Enacted Tax Rate 7 New tax rate 8 Pretax Accounting income at the time of new law =F15 =B17 G H Date Account titles and explanation Debit 1.. 2018 Income tax expense =K3+K4 Deferred tax liability Income tax payable (to record income tax expense) 2.. 2019 Income tax expense =K8-J7 Deferred tax liability =-K14 Income tax payable (to record income tax expense) =30/100 =25/100 =B26 9 Deferred tax liability =F3 Determination of deferred tax liability Ending balance needed =E24 Less: - beginning balance =F15 Adjustment need =K12-K13 =SUM(C15-E15) =E3 2018 2019 2020 2021 11 Pretax accounting income =E5 12 Less: - Temporary Difference =E1 =E2 =E4 13 =B11-B12 =C12 =D12 F E12 14 Tax %age for coming years =E6 =E6 =E6 15 Income tax for coming Years =C13*C14 =D13*D14 =E13*E14 16 Tax %age for current year =E6 17 Income taxable in current Year =B13*B16 18 19 2019 2020 2021 Deferred tax liability 20 Pretax accounting income 21 Less: Temporary difference =B20-B21 =C21 =D21 23 Tax %age for coming years =E7 =E7 24 Income tax for coming years =C22*C23 =D22 D23 =C24+D24 25 Tax %age for current year =E6 26 Income taxable in current year 1=B22*B25 | Future taxable amount Tax rate Deferred Tax liability Deferred Tax liability =E4 =E6 =E6 =J16*J17 =K16*K17 =J18+K18 =E8 =E2 =E3 22

End results would be as follows: -

D G 1 2 3 4 5 6 7 8 А A B C Income recognised for reporting purpose Schedules collections for 2019 Schedules collections for 2020 Schedules collections for 2021 Pretax Accounting income for 2018 Enacted Tax Rate New tax rate Pretax Accounting income at the time of new law 13.00 5.00 6.00 2.00 18.00 30.00% 25.00% 14.00 H JK Date Account titles and explanation Debit Credit 2018 Income tax expense 5.40 Deferred tax liability 3.90 Income tax payable 1.50 (to record income tax expense) 2019 Income tax expense 0.80 Deferred tax liability 1.90 Income tax payable 2.70 (to record income tax expense) 9 10 2021 Deferred tax liability 2.00 2.00 2018 2019 2020 18.00 13.00 5.00 6.00 5.00 5.00 6.00 30% 30% 1.50 1.80 30% 1.50 Determination of deferred tax liability Ending balance needed Less: - beginning balance Adjustment need 2.00 3.90 (1.90) 30% 0.60 11 Pretax accounting income 12 Less: - Temporary Difference 13 14 Tax %age for coming years 15 Income tax for coming Years 16 Tax %age for current year 17 Income taxable in current Year 18 19 20 Pretax accounting income 21 Less: Temporary difference 3.90 Future taxable amount Tax rate Deferred Tax liability Deferred Tax liability 6.00 30% 1.80 2.00 30% 0.60 2.40 22 2019 2020 2021 Deferred tax liability 14.00 5.00 6.00 2.00 9.00 6.00 2.00 25% 25% 1.50 0.50 30% 2.70 2.00 23 Tax %age for coming years 24 Income tax for coming years 25 Tax %age for current year 26 Income taxable in current year