Question

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

2018	$	425,000
2019		345,000
2020		415,000
2021		455,000

Included in the income of 2018 was an installment sale of property in the amount of $60,000. However, for tax purposes, DeVille reported the income in the year cash was collected. Cash collected on the installment sale was $24,000 in 2019, $30,000 in 2020, and $6,000 in 2021.

Included in the 2020 income was $25,000 interest from investments in municipal bonds.

The enacted tax rate for 2018 and 2019 was 30%, but during 2019 new tax legislation was passed reducing the tax rate to 25% for the years 2020 and beyond.

Required:
Prepare the year-end journal entries to record income taxes for the years 2018–2021. (If no entry is required for a transaction/event, select "No journal entry required" in the first account field.)

Answer 1

Solution :

Computation of Taxable Income and Income Tax Payable
Particulars	2018	2019	2020	2021
Pretax accounting income	$425,000.00	$345,000.00	$415,000.00	$455,000.00
Less: Income from installment sale property	-$60,000.00	$0.00	$0.00	$0.00
Add: Collection of installment sales	$0.00	$24,000.00	$30,000.00	$6,000.00
Less: Interest on municipal bonds	$0.00	$0.00	-$25,000.00	$0.00
Taxable Income	$365,000.00	$369,000.00	$420,000.00	$461,000.00
Income Tax Payable	$109,500.00	$110,700.00	$105,000.00	$115,250.00

Computation of Deferred Tax
Particulars	2018	2019	2020	2021
Collection of installment sale as per tax return	$0.00	$24,000.00	$30,000.00	$6,000.00
Income from installment sales as per books	$60,000.00	$0.00	$0.00	$0.00
Taxable Temporary differences	$60,000.00	$0.00	$0.00	$0.00
Reversible Temporary differences		-$24,000.00	-$30,000.00	-$6,000.00
Deferred tax liability	$18,000.00
Reversal of Deferred tax liability 2019 = ($24,000*30% + $36,000*5%) 2020 - $30,000*25% 2021 - $6,000*25%		$9,000.00	$7,500.00	$1,500.00

Journal Entries - Deville Company
Year	Particulars	Debit	Credit
2018	Income Tax Expense Dr	$127,500.00
	To Income tax Payable		$109,500.00
	To Deferred tax liability		$18,000.00
	(To record income tax and deferred tax for 2021)
2019	Income Tax Expense Dr	$101,700.00
	Deferred tax liability Dr	$9,000.00
	To Income tax Payable		$110,700.00
	(To record income tax and deferred tax for 2022)
2020	Income Tax Expense Dr	$97,500.00
	Deferred tax liability Dr	$7,500.00
	To Income tax Payable		$105,000.00
	(To record income tax and deferred tax for 2023)
2021	Income Tax Expense Dr	$113,750.00
	Deferred tax liability Dr	$1,500.00
	To Income tax Payable		$115,250.00
	(To record income tax and deferred tax for 2024)