Question

The DeVille Company reported pretax accounting income on its income statement as follows:

2021	$	370,000
2022		290,000
2023		360,000
2024		400,000

Included in the income of 2021 was an installment sale of property in the amount of $36,000. However, for tax purposes, DeVille reported the income in the year cash was collected. Cash collected on the installment sale was $14,400 in 2022, $18,000 in 2023, and $3,600 in 2024.

Included in the 2023 income was $13,000 interest from investments in municipal governmental bonds.

The enacted tax rate for 2021 and 2022 was 40%, but during 2022, new tax legislation was passed reducing the tax rate to 25% for the years 2023 and beyond.

Required:
Prepare the year-end journal entries to record income taxes for the years 2021–2024. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Step 1: Determine the income tax payable

Particulars	2021	2022	2023	2024
Pretax accounting income	$370,000	$290,000	$360,000	$400,000
Installment sale	($36,000)	$14,400	$18,000	$3,600
Municipal bond interest	-	-	($13,000)	-
Taxable income (tax return)	$334,000	$304,400	$365,000	$403,600
Tax rate	40%	40%	25%	25%
Income tax payable	$133,600	$121,760	$91,250	$100,900

​​​​​Step 2: Determine the cumulative temporary difference of installment sale

Temporary Difference	2021	2022	2023	2024	cumulative temporary difference
	($36,000)	$14,400	$18,000	$3,600	$0
2021		$14,400	$18,000	$3,600	$36,000
2022			$18,000	$3,600	$21,600
2023				$3,600	$3,600
2024					$0

Step 3: Determine the deffered tax liability

	2021	2022	2023	2024
Cumulative temporary difference	$36,000	$21,600	$3,600	$0
Tax rate	40%	25%	25%	25%
Year end balance	$14,400	$5,400	$900	$0
Less: previous year balance	0	($14,400)	($5,400)	($900)
Deffered tax liability credit/ Debit	$14,400	($9,000)	($4,500)	($900)

Step 4: Journal entries

Journal entry at the end of 2021

Date	General journal	Debit	Credit
	Income tax expense	$148,000
	Deffered tax liability		$14,400
	Income tax payable		$133,600

Explanation:

* Income tax expense reduces the shareholders equity. Hence, the debit income tax expense at $148,000.

* Deffered tax liability is a liability and increased by $14,400. Therefore, credit deffered tax liability account with $14,400

* Income tax payable increase the liability by $133,600. Therefore, credit income tax payable account with $133,600.

Working notes:

Income tax expense = Income tax payable+ Deffered tax payable

$133,600+$14,400 =$148,000

Journal entry for 2022

Date	General journal	Debit	Credit
	Income tax expense	$112,760
	Deffered tax liability	$9,000
	Income tax payable		$121,760

Explanation:

* Income tax expense reduces the shareholders equity. Hence, Debit income tax expense with $112,760.

* Deffered tax liability is a liability & it is decreased by $9,000. Therefore, the debit deffered tax liability account with$9,000

* Income tax payable increase the liability by$121,760. Therefore, credit income tax payable account with$121,760.

Working notes:

Income tax expense = income tax payable - deffered tax payable

= $121,760-$9,000 =$112,760.

Journal entry for 2023

Date	General journal	Debit	Credit
	Income tax expense	$86,750
	Deffered tax liability	$4,500
	Income tax payable		$91,250

Explanation;

* Income tax expense reduces the shareholders equity. Hence, Debit income tax expense with $86,750.

* Deffered tax liability is a liability & it is decreased by$4,500. Therefore, the debit deffered tax liability account with$4,500

* Income tax payable increase the liability by $91,250. Therefore credit income tax payable account with $92,250

Working notes:

Income tax expense = $91,250-$4,500 =$86,750

Journal entry for 2024

Date	General journal	Debit	Credit
	Income tax expense	$100,000
	Deffered tax liability	$900
	Income tax payable		$100,900

Explanation:

* Income tax expense reduces the shareholders equity. Hence, debit income tax expense with $100,900.

* Deffered tax liability is a liability & it is decreased by $900 . Therefore, then Debit deffered tax liability account with $900.

* Income tax payable increase the liability by$100,900. Therefore, credit income tax payable account with $100,900.

Working notes:

Income tax expense= $100,900-$900 =$100,000

____×____

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