E 16-26 Multiple differences; (This exercise is a variation of E 16-25, modified

Question

E 16-26 Multiple differences; (This exercise is a variation of E 16-25, modified to include a second temporary difference.) Case Development began operations in December 2018. When property is sold on an installment basis, Case rec- ognizes installment income for financial reporting purposes in the year of the sale. For tax purposes, installment multiple tax rates income is reported by the installment method. 2018 installment income was $600,000 and will be collected over ° LO16-1, LO16-2, the next three years. Scheduled collections and enacted tax rates for 2019-2021 are as follows: 016-4,L016-5, 016-6 2019 $150,000 30% 2020 2021 250,000 200,000 40 40 Case also had product warranty costs of $80,000 expensed for financial reporting purposes in 2018. For tax purposes, only the $20,000 of warranty costs actually paid in 2018 was deducted. The remaining $60,000 will be deducted for tax purposes when paid over the next three years as follows: 2019 2020 2021 $20,000 25,000 5,000 Pretax accounting income for 2018 was $810,000, which includes interest revenue of $10,000 from municipal bonds. The enacted tax rate for 2018 is 30%. Required: I. 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?

Explanation / Answer

1 Case Development Deffered Tax Calculation 2018 2019 2020 2021 Deffered tax Assests/ Liability Book income 810000 a Interset on Muncipla bonds is permanent difference not taxable in Income Tax -10000 No as it is permanent difference b Time Difference of Installment sale not taxed -600000 150000 250000    200,000 Deffered tax Liability c Time Difference of Warrenty cost allowed in income tax 60000 -20000 -25000    (15,000) Deffered tax Assets Taxable Income 260000 130000 225000 185000 Tax Rates 30% 30% 40% 40% Income Tax 78000 Deffered Tax reversal in next years 39000 90000 74000 Deffered tax Liability 203000 journal Enties in books of Case development Debit Credit 1 Profit & Loss a/c                               Dr. 281000 To Current Tax    a/c                                78000 To Deffered tax income a/c 203000 (Being Tax booked) 2 Deffered tax income a/c               Dr. 203000 Deffered tax Liability a/c                203000 (being deffered tax liability booked) 3 Current tax a/c                                   Dr. 78000 To Provisional for Income Tax 78000 (being income tax liability booked) Ans 2 As per above schedule Net taxable Income is 260000 and net income for transfer to reserve & surplus is 810000-281000 = 529000

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