Question

Alsup Consulting sometimes performs services for which it receives payment at the conclusion of the engagement, up to six months after services commence. Alsup recognizes service revenue for financial reporting purposes when the services are performed. For tax purposes, revenue is reported when fees are collected. Service revenue, collections, and pretax accounting income for 2020–2023 are as follows:

Service Revenue Collections Pretax Accounting Income
2015 $560,000 $545,000 $100,000
2016 660,000 665,000 165,000
2017 625,000 600,000 135,000
2018 610,000 635,000 115,000

There are no differences between accounting income and taxable income other than the temporary difference described above. The enacted tax rate for each year is 40%.

Required:
a. Prepare the appropriate journal entry to record Alsup's 2013 income taxes.
b. Prepare the appropriate journal entry to record Alsup's 2014 income taxes.
c. Prepare the appropriate journal entry to record Alsup's 2015 income taxes.

Answer 1

Answer:

Alsup Consulting

Income Taxes

a. Journal Entries for 2015:

Debit Income Tax Expense $40,000

Credit Income Tax Payable $34,000

Credit Deferred Tax Liability $6,000

To record the income tax for the year.

b. Journal Entries for 2016:

Debit Income Tax Expense $66,000

Debit Deferred Tax Asset $2,000

Credit Income Tax Payable $68,000

To record the income tax for the year.

c. Journal Entries for 2017:

Debit Income Tax Expense $54,000

Credit Income Tax Payable $44,000

Credit Deferred Tax Liability $10,000

To record income tax for the year.

d. Journal Entries for 2018:

Debit Income Tax Expense $46,000

Debit Income Tax Payable $56,000

Credit Deferred Tax Asset $10,000

To record income tax for the year.

NB: There is confusion with the years in the question.  So, I decided to give the journal entries for the four years.

Explanation:

 a)            Service      Collections       Pre-tax             Tax        Temporary

               Revenue                         Accounting        Income    Differences

                                                           Income  

2015      $560,000    $545,000     $100,000        $85,000     ($15,000)

2016        660,000      665,000        165,000         170,000          5,000

2017        625,000      600,000        135,000          110,000      (25,000)

2018        610,000       635,000        115,000         140,000       25,000

b)             Accounting                       Tax               Temporary Differences

           Income         Tax          Income    Tax           Income    Deferred Tax

2015  $100,000    $40,000   $85,000   $34,000  ($15,000)    ($6,000) L

2016    165,000      66,000    170,000     68,000       5,000         2,000 A

2017    135,000      54,000     110,000     44,000    (25,000)     (10,000) L

2018    115,000     46,000      140,000   56,000      25,000     (10,000) A

c) The temporary difference between taxes as per accounting income and taxes as per tax regulation is recorded in the books through Deferred tax asset or deferred tax liability. When accounting income is more than tax income it would imply more taxes need to be paid in future, so a deferred tax liability account is created.

d) Tax Computations: The prevalent tax rate of 40% is multiplied with the pre-tax accounting income, the pre-tax taxable income, and the temporary differences in income respectively to obtain their respective taxes.   Ordinarily, the differences in the tax amounts of accounting income and taxable income is deferred tax asset/liability.  The deferred tax asset and liability can still be obtained separately as we have done in this case.  They give the same results.