Case Development began operations in October, 2016 and adopted ASPE. When proper

Question

Case Development began operations in October, 2016 and adopted ASPE. When property is sold on an instalment basis, Case recognizes instalment income for accounting purposes in the year of the sale. For tax purposes, instalment income is recognized as cash collections relating to the properties are made. Gross profit from instalment sales for 2016 was $600,000 and will result in taxable revenue as collections are made over the next three years (with the respective tax rates) as follows: 2017 $150,000 30% 2018 $250,000 40% 2019 $200,000 40% Case also had product warranty expenses for accounting purposes in 2016 of $80,000 of which only $20,000 was paid in cash (tax deductibility is only for cash payments) with the balance to be paid over the next three years as follows: 2017 $20,000 $25,000 2018 2019 $15,000 Pretax accounting income for 2016 was $810,000 which included dividend revenue from taxable Canadian corporations of $10,000 which is not taxable. The tax rate in 2016 is 30%. Required: 1) Prepare the appropriate journal entry to record Case's 2016 income taxes. 2) Provide the income statement excerpt for Case beginning with net income before tax for 2016. 3) How should the future income tax amounts be classified in the balance sheet at December 31, 2016?

Explanation / Answer

journal entries

Profit and loss a/c dr 240000$

(810000-10000)*30/100

To income tax payable a/c 78000$

(810000-600000+80000-20000-10000)*30/100  

To deferred tax a/c 162000$

(being income tax payable for the year 2016)

Income statement

accounting income 810000$

less income tax payable (240000$)

Profit after taxes 570000$

Disclosure in balance sheet

other current liabilities

Deferred tax Liability 162000$

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