intermediate theory 2

Problem 1

Sapphire Development began operations in 2016. When lots for industrial development are sold, Sapphire recognizes income for financial reporting purposes in the year of the sale. For some lots, Sapphire recognizes income for tax purposes when collected. Income recognized for financial reporting purposes in 2016 for lots sold this way was $48 million which will be collected over the next three years.

Scheduled collections for 2017-2019 are as follows:

2017 $16 million

2018 $20 million

2019 $12 million

$48 million

Pretax accounting income for 2016 was $68 million. The enacted tax rate is 40 percent.

a. Prepare a journal entry to record the company’s tax provision for the year 2016. (3 points)

Workings:

b. Suppose a new tax law, revising the tax rate from 40% to 35%, beginning in 2018, is enacted in 2017, when pretax accounting income was $60 million.

Prepare a journal entry (entries) to record the company’s tax provision for the year 2017. (5 points)

Workings:

c. What is the balance of the Deferred Tax Asset or Deferred Tax Liability at the end of 2017? (1 points)

Problem 2

For 2018, its first year of operations, HD Corporation’s reconciliation of pretax accounting income to taxable income is as follows:

HD’s tax rate is 40%.

HD determined that it was more likely than not that 30% of the deferred tax asset ultimately would not be realized.

1. Prepare a journal entry (entries) to record the company’s tax provision for the year 2018. (5 points)
2. What is the net income on the income statement for the year ended December 31, 2018? (2 points)

Workings: