Tru Developers, Inc., sells plots of land for industrial development. Tru recognizes income for financial reporting purposes
Question:
2019..............................$36 million
2020................................24 million
....................................$60 million
Tru's pretax accounting income for 2018 was $90 million. In its income statement, Tru reported interest income of $15 million, unrelated to the land sales, for which the company's position is that the interest is not taxable. Accordingly, the interest was not reported on the tax return. There are no differences between accounting income and taxable income other than those described above. The enacted tax rate is 40 percent.
Management believes the tax position taken on the land sales has a greater than 50% chance of being upheld based on its technical merits, but the position taken on the interest has a less than 50% chance of being upheld. It is further believed that the following likelihood percentages apply to the tax treatment of the land sales ($ in millions):
Amount Qualifying for Percentage Likelihood of
Installment Sales Treatment Tax Treatment Being Sustained
$60....................................................................20%
50.....................................................................20%
40.....................................................................20%
30.....................................................................20%
20.....................................................................20%
Required:
1. What portion of the tax benefit of tax-free interest will Tru recognize on its 2018 tax return?
2. What portion of the tax benefit of tax-free interest will Tru recognize on its 2018 financial statements?
3. What portion of the tax on the $60 million income from the plots sold on an installment basis will Tru defer on its 2018 tax return? What portion of the tax on the $60 million income from the plots sold on an installment basis will Tru defer in its 2018 financial statements? How is the difference between these two amounts reported?
4. Prepare the journal entry to record income taxes in 2018, assuming full recognition of the tax benefits in the financial statements of both differences between pretax accounting income and taxable income.
5. Prepare the journal entry to record income taxes in 2018, assuming the recognition of the tax benefits in the financial statements you indicated in requirements 1-3.
Financial Statements
Financial statements are the standardized formats to present the financial information related to a business or an organization for its users. Financial statements contain the historical information as well as current period’s financial...
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Related Book For
Intermediate Accounting
ISBN: 9781259722660
9th Edition
Authors: J. David Spiceland, James Sepe, Mark Nelson, Wayne Thomas
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