Question

Dixon development began operations in december 2018. when lots for industrial development are sold, dixon recognizes income for financial reporting purposes in the year of the sale. for some lots, dixon recognizes income for tax purposes when collected. income recognized for financial reporting purposes in 2018 for lots sold this way was $10 million, which will be collected over the next three years. scheduled collections for 2019–2021 are as follows: 2019 $ 4 million 2020 4 million 2021 2 million $ 10 million

Answer 1

The question focuses on the different revenue recognition methods used by Dixon Development for financial reporting (accrual basis) versus tax purposes (cash basis), leading to deferred tax implications over a three-year collection period of recognized income.

Step-by-step explanation:

The question relates to the accounting treatment of revenue recognition for a company named Dixon Development. This situation involves a difference between financial accounting and tax accounting. For financial reporting purposes, Dixon Development recognizes income when the sale occurs, which is known as the accrual basis of accounting. However, for tax purposes, Dixon recognizes income when it is collected, which is known as the cash basis of accounting. Due to the timing difference in revenue recognition, this creates a temporary difference that will lead to deferred tax considerations.

In 2018, Dixon Development recognized $10 million in income for financial reporting purposes from lots sold under these terms. This income will be collected over the following three years with a collection schedule of $4 million in 2019, $4 million in 2020, and $2 million in 2021.

Answer 2

tax expense = $5.6 million

Deferred tax liability = $4 million

Taxes payable = $1.6 million

Step-by-step explanation:

Assuming no differences between accounting income and taxable income, the journal entry to record income taxes in 2018 is given as:

Pretax accounting income $14 million

Sales revenue from lot sales $10 million

Collections from lot sales 0 million

Taxable income = Pretax accounting income - sales revenue from lot sales + collections from lot sales = $14 million - $10 million = $4 million

Since the tax rate = 40% = 0.4, Therefore:

tax expense = Pretax accounting income × tax rate = $14 million × 0.4 = $5.6 million

Deferred tax liability = Sales revenue from lot sales × tax rate = $10 million × 0.4 = $4 million

Taxes payable = taxable income × tax rate = $4 million × 0.4 = $1.6 million