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24 November, 20:28

Tower Corp. began operations on January 1, 20X2. For financial reporting, Tower recognizes revenue from all sales under the accrual method. However, in its income tax returns, Tower reports qualifying sales under the installment method.

Tower's gross profit on these installment sales under each method is as follows:

YearAccrual method Installment method20x2$1.6mn $600,00020x3$2.6mn $1.4mnThe income tax rate is 30% for 20x2 and future years. There are no other temporary or permanent differences. In its December 31, 20x3 balance sheet, what amount should Tower report as a liability for deferred income taxes? A. $840,000B. $660,000C. $600,000D. $360,000

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  1. 24 November, 20:42
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    B. $660,000

    Explanation:

    Year Financial income Taxable income Temporary difference

    1990 $1,600,000 $600,000 $1,000,000

    1991 $2,600,000 $1,400,000 $1,200,000

    Total $4,200,000 $2,000,000 $2,200,000

    In the table above, The temporary difference = Financial income - Taxable income.

    For year 1990, The temporary difference = $1,600,000 - $600,000 = $1,000,000

    For year 1991, The temporary difference = $2,600,000 - $1,400,000 = $2,200,000

    Total Financial income = $1,600,000 + $2,600,000 = $4,200,000

    Total taxable income = $600,000 + $1,400,000 = $2,000,000

    The total temporary difference = Total financial income - Total taxable income = $4,200,000 - $2,000,000 = $2,200,000

    The income tax rate = 30% = 0.3

    Therefore the deferred income taxes = total temporary difference * income tax rate = $2,200,000 * 0.3 = $660,000
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