Akai Company, which began operations at the beginning of 2021, produces various products on a contract basis. Each contract generates an income of ¥100,000. Some of Akai’s contracts provide for the customer to pay on an installment basis. Under these contracts, Akai collects one-fifth of the contract revenue in each of the following four years. For financial reporting purposes, the company recognizes income in the year of completion (accrual basis); for tax purposes, Akai recognizes income in the year cash is collected (installment basis). Akai reported pretax financial income of ¥600,000 for 2021, and of ¥520,000 for 2022. Tax rates enacted before the end of 2021 were 50%, but 40% for 2022 and later years. Akai uses the calendar year as its accounting period. Presented below is information related to Akai’s operations for 2021 and 2022.
Year 2021:
1. The company completed 7 contracts that allow for the customer to pay on an installment basis. The company expects future collections on the related receivables to result in taxable amounts of ¥140,000 in each of the next four years.
2. At the beginning of 2021, Akai purchased depreciable assets with a cost of ¥540,000. For financial reporting purposes, Akai depreciates these assets using the straight-line method over a 5-year service life. For tax purposes, the company uses the double-declining balance method over five years.
3. The company warrants its product for two years from the date of completion of a contract. At the yearend of 2021, the product warranty liability accrued for financial reporting purposes was ¥156,000, in which Akai expects to settle by expenditures of ¥56,000 in 2022 and ¥100,000 in 2023.
4. In 2021, non-taxable governmental bond interest revenue was ¥22,000. 5. During 2021, non-deductible fines and penalties of ¥30,000 were paid.
Year 2022:
1. In 2022, the company completed 5 new contracts that allow for the customer to pay on an installment basis. These installment sales created new installment receivables, Future collections of these receivables will result in reporting income of ¥100,000 for tax purposes in each of the next four years.
2. An analysis at the end of 2022 of the product warranty liability account showed the following details.
Balance of liability at beginning of 2022 ¥156,000
Expense for 2022 income statement purposes 180,000
Amount paid for contracts completed in 2021 (56,000)
Amount paid for contracts completed in 2022 (50,000)
Balance of liability at end of 2022 ¥230,000
3. In January 2022, ¥225,000 is collected in advance rental of a building for a 3-year period. The entire ¥225,000 is reported as taxable income in 2022, but ¥150,000 of the ¥225,000 is reported as unearned revenue in 2022 for financial reporting purposes.
4. During 2022, non-taxable governmental bond interest revenue was ¥24,000.
Required:
(1) determine the amount of the cumulative temporary difference for each transaction at December 31, 2021 and 2022.
(2) Compute taxable income for 2021 and 2022.
(3) Prepare the journal entry to record 2022 income tax expense, income taxes payable, and deferred taxes, assuming Akai is expected to have taxable income in all future years.
(4) Prepare the bottom portion of Akai’s 2022 income statement, beginning with "Income before income taxes".
(5) Indicate how deferred income taxes should be presented on the December 31, 2022, statement of financial position.
