Tower Corp. began operations on January 1, 20X2. For financial reporting, Tower recognizes revenue from all sales under the accrual method. However, in its income tax returns, Tower reports qualifying sales under the installment method.
Tower's gross profit on these installment sales under each method is as follows:
YearAccrual method Installment method20x2$1.6mn $600,00020x3$2.6mn $1.4mnThe income tax rate is 30% for 20x2 and future years. There are no other temporary or permanent differences. In its December 31, 20x3 balance sheet, what amount should Tower report as a liability for deferred income taxes?A. $840,000B. $660,000C. $600,000D. $360,000

B. $660,000

Explanation:

Year      Financial income           Taxable income       Temporary difference

1990         $1,600,000                   $600,000                           $1,000,000

1991           $2,600,000                 $1,400,000                         $1,200,000

Total          $4,200,000                   $2,000,000                       $2,200,000

In the table above, The temporary difference = Financial income - Taxable income.

For year 1990, The temporary difference =  $1,600,000 - $600,000 = $1,000,000

For year 1991, The temporary difference =   $2,600,000 - $1,400,000 =  $2,200,000

Total Financial income =  $1,600,000 + $2,600,000 = $4,200,000

Total taxable income = $600,000 + $1,400,000 = $2,000,000

The total temporary difference = Total financial income - Total taxable income = $4,200,000 - $2,000,000 = $2,200,000

The income tax rate = 30% = 0.3

Therefore the deferred income taxes = total temporary difference * income tax rate = $2,200,000 * 0.3 = $660,000

answerboth the short run phillips curve and the aggregate demand and aggregate supply model