ACCT3103 - Intermediate Financial Accounting II

Assignment 4

Question 1 (Deferred income taxes)

Pink Corporation began operations on January 1, 2021. When goods are sold, Pink recognizes income
for financial reporting purposes in the year of sale and for tax purposes when cash is collected. For the
year ended December 31, 2021, Pink had pretax accounting income of $22 million and taxable income
of $12 million. The 2021 tax rate was 30%. Scheduled collections and tax rates (based on recent tax
legislation) for 2022-2024 are as follows:

Year Cash Collection Tax Rate

2022 $ 3 million 25%
2023 $ 4 million 25%
2024 $ 3 million 20%

There are no differences between accounting income and taxable income other than those described
above.

Required:
1. Prepare the appropriate journal entries to record Pink’s income taxes for 2021.
2. A new tax law, revising the tax rate to 20%, beginning in 2023, was enacted in 2022. Prepare the
appropriate journal entries to record Pink’s income taxes for 2022 when pretax accounting income
is $17 million. Show calculations.
Question 2 (Netting of deferred tax assets and liabilities):
Green Corporation computed a pretax financial income of $3,750,000 for the first year of its
operations ended December 31, 2021. Included in financial income was $45,000 of nontaxable
revenue, $300,000 gross profit on installment sales that was deferred for tax purposes until the
installments were collected, and $90,000 in warranties payable that had been recognized as expense
on the books in 2021 when product sales were made.
The temporary differences are expected to reverse in the following pattern:

Year Gross Profit on Warranty

collections payments
2022 $154,000 $50,000
2023 90,000 20,000
2024 36,000 14,000
2025 20,000 6,000
$300,000 $90,000

The enacted tax rates for this year and the next four years are as follows:
2021 – 20% 2024 – 15%
2022 – 20% 2025 – 15%
2023 – 20%

Required:
1. Prepare journal entries to record income taxes payable and deferred income taxes for the year
ended December 31, 2021. Assume there will be sufficient income in each future year to realize
any deductible amount.
2. Prepare partial Income statement for the year ended December 31, 2021 beginning with income
from continuing operation before income taxes.