A is corrent. For accounting purposes, installment income of $250,000 is recognized using the accrual method. For tax purposes, the installment income is recognized over 4 years (year 3-year 6). Using the installment method results in future taxable amounts at 12/31/Y3. Cory’s deferred tax liability should be based on future enacted tax rates (30% for year 4 and year 5 and 25% for year 6). Therefore, the 12/31/Y3 deferred tax liability is $62,500, as computed below.
| Year | Taxable amount | | Rate | | DT liability | | Year 4 | $ 50,000 | × | 30% | = | $15,000 | | Year 5 | 75,000 | × | 30% | = | 22,500 | | Year 6 | 100,000 | × | 25% | = | 25,000 | | | | | | | $62,500 |
B is incorrect. For accounting purposes, installment income of $250,000 is recognized using the accrual method. For tax purposes, the installment income is recognized over 4 years (year 3-year 6). Using the installment method results in future taxable amounts at 12/31/Y3. Cory’s deferred tax liability should be based on future enacted tax rates (30% for year 4 and year 5 and 25% for year 6). Therefore, the 12/31/Y3 deferred tax liability is $62,500, as computed below.| Year | Taxable amount | | Rate | | DT liability | | Year 4 | $ 50,000 | × | 30% | = | $15,000 | | Year 5 | 75,000 | × | 30% | = | 22,500 | | Year 6 | 100,000 | × | 25% | = | 25,000 | | | | | | | $62,500
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B is incorrect. For accounting purposes, installment income of $250,000 is recognized using the accrual method. For tax purposes, the installment income is recognized over 4 years (year 3-year 6). Using the installment method results in future taxable amounts at 12/31/Y3. Cory’s deferred tax liability should be based on future enacted tax rates (30% for year 4 and year 5 and 25% for year 6). Therefore, the 12/31/Y3 deferred tax liability is $62,500, as computed below. B is incorrect. For accounting purposes, installment income of $250,000 is recognized using the accrual method. For tax purposes, the installment income is recognized over 4 years (year 3-year 6). Using the installment method results in future taxable amounts at 12/31/Y3. Cory’s deferred tax liability should be based on future enacted tax rates (30% for year 4 and year 5 and 25% for year 6). Therefore, the 12/31/Y3 deferred tax liability is $62,500, as computed below.| Year | Taxable amount | | Rate | | DT liability | | Year 4 | $ 50,000 | × | 30% | = | $15,000 | | Year 5 | 75,000 | × | 30% | = | 22,500 | | Year 6 | 100,000 | × | 25% | = | 25,000 | | | | | | | $62,500
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