Adler AG, which began operations at the beginning of 2017, produces various products on a contract basis. Each contract generates income of €80,000. Some of Adler's contracts provide for the customer to pay on an installment basis. Under these contracts, Adler collects one-fifth of the contract revenue in each of the following 4 years. For financial reporting purposes, the company recognizes income on an accrual basis; for tax purposes, Adler recognizes income in the year cash is collected (installment basis).
Presented below is information related to Adler's operations for 2019.
1. In 2019, the company completed seven contracts that allow for the customer to pay on an installment basis. Adler recognized the related income of €560,000 for financial reporting purposes. It reported only €112,000 of income on installment sales on the 2019 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 4 years.
2. Non-taxable government bond interest revenue was €28,000.
3. Non-deductible fines and penalties of €26,000 were paid.
4. Pretax financial income amounts to €500,000.
5. Tax rates (enacted before the end of 2019) are 50% for 2019 and 40% for 2020 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 had a deferred tax liability balance of €40,000 related to prior year installment sales at the end of 2018. None of this temporary difference reversed in 2019.
Accounting
Prepare the journal entry to record income taxes for 2019.
Analysis
Classify deferred income taxes on the statement of financial position at December 31, 2019, and indicate, starting with income before income taxes, how income taxes are reported on the income statement. What is Adler's effective tax rate?
Principles
Explain how the IASB Conceptual Framework is used as a basis for determining the proper accounting for deferred income taxes.