Cory, Inc., uses the accrual method of accounting for financial reporting purpos
ID: 2544320 • Letter: C
Question
Cory, Inc., uses the accrual method of accounting for financial reporting purposes and appropriately uses the installment method of accounting for income tax purposes. Installment income of $250,000 will be collected in the following years when the applicable enacted tax rates are Year Year 1 Year 2 Year 3 Year 4 Collection of Income 25,000 50,000 75,000 100,000 Enacted Tax Rates 30% 30% 30% 2.5% The installment income is Cory's only temporary difference. What amount should be included in the deferred income tax liability in Cory's December 31, Year 1, balance sheet? A. $62,500 B. $75,000 C. $70,000 D. $67,500 (Alt + A)Explanation / Answer
Deferred income tax liability as on December 31 , Year 1 :
$50,000 * 30 % + $75,000 * 30 % + $100,000 * 25 % = $62,500
Explanation : For accountibg pupose we recognise the whole installment income of $250,000 based on accrual method . Whereas for taxation purpose , income shall be recognise over 4 years .This results in deferred income tax liability arising due to temporary difference between accounting profit & profit under taxation. Thus Deferred income tax liability shall be bases on future tax rate of Year 2 , 3 & 4 .