Gallo Light began operations in 2021. The company sometimes sells used warehouses on an installment basis. In those cases, Gallo Light reports income in its income statement in the year of the sale. In its income tax return, though, Gallo Light reports installment income by the installment method. Installment income in 2021 was $570,000, which Gallo Light expects to collect equally over the next three years. The tax rate is 25%, but based on an enacted law, is scheduled to become 30% in 2023.

Gallo Light's pretax accounting income from the 2021 income statement was $824,000, which includes $34,000 of interest revenue from an investment in municipal bonds. There were no differences between accounting income and taxable income other than those described above.

Required:

1. Prepare the appropriate journal entry to record Gallo Light's 2021 income taxes. Show calculations.
2. What is Gallo Light's 2021 net income?

Answer and Explanation:

Before passing the journal entries we need to do following calculations

ParticularCurrent year  Future taxable amounts($ in 000s)

                        20212022      2023         2024  

Accounting

income         $824    

less: Permanent

difference($34 )    

Temporary difference :      

less: installments

sales         ($570 )    $190       $190        $190  

Taxable

income          $220    

Multiply

Enacted tax rate 25%   25%          30%30%  

Tax payable

currently      $55

Deferred tax liability        $47.5              $57       $57             $161.50

Less: Beginning balance                         $0

Change in balance : credit (debit )           $161.50

1. Now the journal entry is

On 2021

Income tax expense ($161.50 + $55)$216.50  

                        To  Deferred tax liability $161.50

                         To Income tax payable $55

(Being the income tax for 2021 is recorded)

2. And, the net income is

= Pre accounting income - income tax expense

= $824,000 - $216,500

= $607,500