Question

Shortly before the end of 2016, Colter Company makes an installment sale that generates $400 of before-tax income. Colter recognizes income for accounting purposes when the sale is made, but will recognize income for tax purposes when cash is subsequently collected in 2017. Colter has a tax rate of 40%. As a result of this transaction, colter's tax expense journal entry would include a:

a. Debit to Deferred tax liability for $400.
b. Credit to Deferred tax liability for $400.
c. Debit to Deferred tax liability for $160.
d. Credit to Deferred tax liability for $160.

Answer 1

Colter Company's tax expense journal entry would include a credit to the income tax expense account for $160, as the income is recognized for accounting purposes in the current year. The deferred tax liability account does not come into play in this transaction.

Step-by-step explanation:

In this scenario, Colter Company has made an installment sale that generates $400 of before-tax income. Colter recognizes income for accounting purposes when the sale is made but will recognize income for tax purposes when cash is subsequently collected in 2017. Colter has a tax rate of 40%.

Since the income is recognized for accounting purposes in the current year, Colter will also record the tax expense for that year. The tax expense journal entry would include a credit to the income tax expense account for $400 x 40% = $160. This is because the company needs to account for the taxes it will eventually pay on the income generated from the sale.

However, the deferred tax liability account does not come into play in this transaction because it represents the future tax consequences of temporary differences between the accounting and tax treatment of certain items. In this case, there is no temporary difference since the income is recognized for tax purposes in the same year it is recognized for accounting purposes.