Required: 1. Please calculate the taxable income in Year 1. 2. Will the difference between accounting and tax to account for installment sales generate deferred tax assets or deferred tax liabilities? 3. Please prepare the journal entry to recognize income tax in Year 1.
Karma Inc. has installment sales to customers and recognizes the full installment sales as revenues for accounting purposes although it receives cash payments from customers in later periods. For tax purposes, the installment sales are taxable when cash payments are received. Amounts for pretax accounting income which included the installment sales, installment sales reported on income statement, and cash payments received from installment sales in year 1, year 2, and year 3 are as follows:
Year 1 Year 2 Year 3
Pretax accounting Income $800,000 $500,000 $600,000
Installment sales income on 200,000 0 0
income statement
Cash payments received from 80,000 50,000 70,000
installment sales
The enacted tax rate is 25% in Year 1 and 20% in Year 2 and Year 3.
Required:
1. Please calculate the taxable income in Year 1.
2. Will the difference between accounting and tax to account for installment sales generate
3. Please prepare the
4. Please calculate the taxable income in Year 2.
5. Please prepare the journal entry to recognize income tax in Year 2 when tax rate is reduced to 20%.
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