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

To record Alsup's 2015 income taxes, calculate the current tax expense and the deferred tax based on differences between book and taxable revenue. The tax expense of $40,000 is based on the pretax accounting income, and the deferred tax liability of $6,000 is on the temporary difference between revenue and collections.

Step-by-step explanation:

Calculation of Alsup's Income Taxes for 2015

First, to prepare the journal entry for Alsup's 2015 income taxes, you must calculate the tax payable and the deferred tax liability. Since there is a temporary difference between the service revenue recognized for financial reporting ($560,000) and tax purposes (collections, $545,000), we will calculate the deferred tax.

Current tax expense (based on accounting income):
$100,000 × 40% = $40,000.

Deferred tax liability (based on difference between service revenue and collections):
($560,000 - $545,000) × 40% = $6,000.

Journal Entry for 2015 Income Taxes:

• Tax expense (current) $40,000
• Tax expense (deferred) $6,000
• To taxes payable $40,000
• To deferred tax liability $6,000

Do note that the original question refers to incorrect dates, as it asks for journal entries for years that come before the service revenue and collections information provided. In such cases, well-established procedures should be followed, including consideration of the information as illustrated for the year 2015.

Answer 2

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.

Step-by-step 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.