Reference no: EM132634420

Question - DeJohn Company, which began operations at the beginning of 2018, produces various products on a contract basis. Each contract generates a gross profit of $80,000. Some of DeJohn's contracts provide for the customer to pay on an installment basis. Under these contracts, DeJohn collects one-fifth of the contract revenue in each of the following four years. For financial reporting purposes, the company recognizes gross profit in the year of completion (accrual basis). For tax purposes, DeJohn recognizes gross profit in the year cash is collected (installment basis).

Presented below is information related to DeJohn's operations for 2020:

1. In 2020, the company completed seven contracts that allow for the customer to pay on an installment basis. DeJohn recognized the related gross profit of $560,000 for financial reporting purposes. It reported only $112,000 of gross profit on installment sales on the 2020 tax return. The company expects future collections on the related installment receivables to result in taxable amounts of $112,000 in each of the next four years.

2. In 2020, nontaxable municipal bond interest revenue was $28,000.

3. During 2020, nondeductible fines and penalties of $26,000 were paid.

4. Pretax financial income for 2020 amounts to $500,000.

5. Tax rates (enacted before the end of 2020) are 30% for 2020 and 20% for 2021 and later.

6. The accounting period is the calendar year.

7. The company is expected to have taxable income in all future years.

8. The company has no deferred tax assets or liabilities at the end of 2019.

Requirement 1: Accounting

Prepare the journal entry to record income taxes for 2020.

Requirement 2: Analysis

a. Indicate, starting with Income before income taxes, how income taxes are reported on the income statement. What is DeJohn's effective tax rate?

b. Classify deferred income taxes on the balance sheet at December 31, 2020.