Question

Isaac Inc. began operations in January 2021. For some property sales, Isaac recognizes income in the period of sale for financial reporting purposes. However, for income tax purposes, Isaac recognizes income when it collects cash from the buyer's installment payments. In 2021, Isaac had $676 million in sales of this type. Scheduled collections for these sales are as follows:

2021 $83 million
2022 137 million
2023 129 million
2024 162 million
2025 165 million
$676 million

Assume that Isaac has a 25% income tax rate and that there were no other differences in income for financial statement and tax purposes.

Required:
What deferred tax liability would Isaac report in its year-end 2021 balance sheet?

Answer 1

$148.3 million

Step-by-step explanation:

Calculation to determine the deferred tax liability that Isaac would report in its year-end 2021 balance sheet

Using this formula

Deferred tax liability=Total future taxable income × Tax rate

Let plug in the formula

Deferred tax liability=(2022 137 million+2023 129 million+2024 162 million+2025 165 million)*25%

Deferred tax liability=$593 million*25%

Deferred tax liability=$148.3 million

Therefore the deferred tax liability that Isaac would report in its year-end 2021 balance sheet is $148.3 million