2014 2015 2016

Sales 385000 426000 525000

Cost of sales 270000 277000 341000
Gross profit 115000 149000 184000
Gross profit realized on installment
sales (See calculation below 33000 69300 113600
Total gross profit 148000 218300 297600

Selling expenses 77000 87000 92000

Administrative expenses 50000 51000 52000
Total selling and administrative
expenses 127000 138000 144000
Net income 21000 80300 153600

calculation of gross profit realized on installment sales:

2014 2015 2016
Rate of gross profit 33% 36% 40%
Gross profit realized:
33% of $100.000 33000
33% of $ 90,000 29700
36% of $110.000 39600
33% of S 40,000 13200
36% of $140,000 50400
40% of $125,000 50000
33000 69300 113600
a Installment Accounts Receivable,2014. 500000
Installment Sales Revenue... 500000

cash 180000
Installment Accounts Receivable, 2014.... 180000

Cost of Installment Sales 350000

Inventory..... 350000

Reposses sed Merchandise. 11200

Deferred Gross Profit, 2014 7200
Loss on Repossession. 5600
Installment Accounts Receivable, 2014.... 24000

rate of gross profit 30%

7200

Installment Sales Revenue 500000

Cost of Installment Sales 350000
Deferred Gross Profit, 2014 150000

b Deferred Gross Profit, 2014. 54000

Realized Gross Profit (30% of $180,000 54000
a Schedule of Pretax Financial Income
and Taxable Income for 2014

Pretax financial income $ 750,000

Permanent differences
Insuran ce expense $ 9,000
Bond interest revenue $ -4,000
Pollution fines. $ 4,200
$ 759,200
Temporary differences
Depreciation
expense $ -30,000
Installment sales $ -25,000
Warranty expense $ 40,000
Taxable income $ 744,200

Depreciation for books $ 60,000

Depreciation tax return $ 90,000
$ 30,000
The income taxes payable for 2014 is as follows
Taxable income $ 744,200
Tax rate 30%
Income taxes payable $ 223,260

b The journal entry to record income taxes payable, income tax expense
and deferred income taxes is as follows:

Income Tax Expense $ 227,760

Deferred Tax Asset $ 12,000
Deferred Tax Liability $ 16,500
Income Taxes Payable $ 223,260

Deferredtax expense for 2014 $ 16,500

Deferred tax benefit for 2014 $ -12,000
Net deferred tax expense for 2014 $ 4,500
Current tax expense for 2014 $ 223,260
Income tax expense for 2014 $ 227,760
a. Pretax financial income 100000
Permanent differences:
Fine for pollution 3500
Tax-exempt interest. -1500
Originating temporary differences:
Excess warranty expense per books 5000
Excess construction profits per books 25000
Excess depreciation per tax return 20000
Taxable income 62000

c. Income Tax Expense $ 40,800

Deferred Tax Asset $ 2,000
Deferred Tax Liability $ 18,000
Income Taxes Payable $ 24,800

Taxable income for 2015 [answer part (a)] $ 62,000

Tax rate 40%
Income taxes payable for 2015. $ 24,800

Deferred tax liability at the end of 2015 [part (b)] $ 18,000

Deferred tax liability at the beginning of 2015 $ -
Deferred tax expense for 2015 $ 18,000

Deferred tax asset at the end of 2015. $ 2,000

Deferred tax asset at the beginning of 2015 $ -
Deferred tax benefit for 2015 $ -2,000

Deferred tax expense for 2015 $ 18,000

Deferred tax benefit for 2015 $ -2,000
Net deferred tax expense for 2015 $ 16,000

Current tax expense for 2015 (Income taxes payable) $ 24,800

Deferred tax expense for 2015 $ 16,000
Income tax expense for 2015. $ 40,800

d. Income before income taxes $ 100,000

Income tax expense
Current. $ 24,800
Deferred $ 16,000 $ 40,800
Net income $ 59,200
b. Temporary Difference future taxable (deductible) Amounts Tax Rate

Warranty costs $ -5,000 40%

Construction profits $ 25,000 40%
Depreciation $ 20,000 40%
Totals $ 40,000
Deferred Tax
Asset Liability
$ -2,000
$ 10,000
$ 8,000
$ -2,000 $ 18,000