Case Development began operations in December 2018. When property is sold on an

ID: 2518913 • Letter: C

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 $600,000 and will be collected over the next three years. Scheduled collections and enacted tax rates for 2019–2021 are as follows:

Pretax accounting income for 2018 was $780,000, which includes interest revenue of $30,000 from municipal bonds. The enacted tax rate for 2018 is 20%.

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?

2019 $ 130,000 20 % 2020 330,000 30 2021 140,000 30

Explanation / Answer

a. ($ in thousands)

2018

2019

2020

2021

Pretax accounting income

780

Permanent difference

(30)

Temporary difference:

Installment sales

(600)

130

330

140

Taxable income (tax return)

150

Enacted tax rate

20%

30%

Tax payable currently

Deferred tax liability

167

Deferred tax liability:

Ending balance (balance currently needed) $167

Less: beginning balance (0)

Change needed to achieve desired balance $167

General Journal

Debit

Credit

Income tax expense (to balance)

197

Deferred tax liability (determined above)

167

Income Tax payable

b. Net Income = $ 780 - $197 = $583