Casey Inc. uses the accrual method of accounting for financial reporting purposes and the instalment method of accounting for income tax purposes. Instalment income of $ 930,000 will be collected in the following years when the enacted tax rates are: $$\begin{array} { c c c }
& \text { Collection of Income } & \text { Enacted Tax Rates } \
2020 & \$ 120,000 & 35 \% \
2021 & 180,000 & 30 \% \
2022 & 270,000 & 30 \% \
2023 & 360,000 & 25 \%
\end{array}$$ The instalment income is Casey's only reversible difference. What amount should be included as the deferred tax liability on their December 31, 2020 SFP?

Question

Casey Inc. uses the accrual method of accounting for financial reporting purposes and the instalment method of accounting for income tax purposes. Instalment income of $ 930,000 will be collected in the following years when the enacted tax rates are: $$\begin{array} { c c c } 
& \text { Collection of Income } & \text { Enacted Tax Rates } \
 2020 & \$ 120,000 & 35 \% \
2021 & 180,000 & 30 \% \
2022 & 270,000 & 30 \% \
2023 & 360,000 & 25 \%
\end{array}$$ The instalment income is Casey's only reversible difference. What amount should be included as the deferred tax liability on their December 31, 2020 SFP?

Quizplus · Accepted Answer

The deferred tax liability is the difference between the tax expense calculated using the accrual method and the tax expense calculated using the instalment method. The tax expense calculated using the accrual method is $325,500 (930,000 * 35%). The tax expense calculated using the instalment method is $270,000 (120,000 * 35% + 180,000 * 30%). The deferred tax liability is therefore $55,500 (325,500 - 270,000).

Casey Inc Uses the Accrual Method of Accounting for Financial Reporting