can someone please explain the illustration 16-1 and illustration 16-1A to me. I have to understand this before the exam tomorrow. (I provided extra info if u need it)

TEMPORARY DIFFERENCES LO16-1 Describe the tybes of temporary differences that cause deferred tax liabilities and determine the amounts needed to record periodic income taxes. The differences in the rules for computing taxable income and those for financial reporting often cause amounts to be included in taxable income in a year later-or earlier-than the year in which they are recognized for financial reporting purposes. For example, you learned in Chapter 4 @ that income from selling properties on an installment basis is reported for financial reporting purposes This means taxable income might be less than accounting income in the year of an installment sale but higher than accounting income in later years when installment income is collected in the year of the sale. But tax laws permit installment income to be reported on the tax return as it actually is received. Temporary differences arise when tax rules and accounting rules recognize income in different periods. The situation just described creates what's referred to as a temporary differen ce between pretax accounting income and taxable income and, consequently between the amount of an asset or liability that is reported in the financial statements and the equivalent amount, called the tax basis of an asset or a liability. that is included in the company's tax records. In our example, the asset for which the temporary difference exists is the installment receivable that's recognized for financial reporting purposes, but not for tax purposes. DEFERRED TAX LIABILITIES It's important to understand that a temporary difference originates in one period and reverses, or turns around, in one or more subsequent periods. The temporary difference described above originates in the year the installment sales are made and are reported DEFERRED TAX LIABILITIES It's important to understand that a temporary difference originates in one period and reverses, or turns around, in one or more subsequent periods. The temporary difference described above originates in the year the installment sales are made and are reported in the income statement. The temporary difference reverses in a Page 909 future period when the installments are collected and income is reported on the tax return. An example is provided in Illustration 16-1g. Illustration 16-1 Revenue Reported on the Tax Return ofter the Income Statement Kent Land Management reported pretax accounting income in 2018, 2019, and 2020 of $100 million, plus additional 2018 income of $40 million from installment sales of property. However, the installment sales income is reported on the tax return when collected, in 2019 (S10 million) and 2020 ($30 million) * The enacted tax rate is 40% each year Total $340 (40) 01 30 40 2018 $140 (40) (S in millions) 2019 2020 Pretax accounting income S100 $100 In 2018, taxable income is less than accounting income because income from installment sales is not reported on the tax Installment sale income on the income statement Installment sale income on the tax return $100 110 $130 34 returm und 2019-2020. Taxable income (tax return) The installment method is not available to accrual method taxpayers. H.R 11S0, sec. 536, 1999 The 2018 deferred tax liability will become tax payable in the next two years. Notice that pretax accounting income and taxable income total the same amount over the three-year period but are different in each individual year. In 2018, taxable income is s40 million less than accounting income because it does not include income from installment sales. The difference is temporary, though. That situation reverses over the next two years. In 2019 and 2020 taxable income is more than accounting income because income from the installment sales, reported in the income statement in 2018, becomes taxable during the next two years as installments are collected. should be r ecognized as With future taxableamounts of $40 million, taxable at 40%, a $16 million deferred taxliability the end of 2018. Because no psevious balance exists, we credit deferred tax liability for the entire $16 million. Each year, income tax expense comprises both the current and the deferred tax consequences of events and already recognized. This means we: transactions Page 910 1. Calculate the income tax that is payable currently. 2. Calculate what the ending balance in the deferred tax liability (or asset) should be. 3- 4 Combine that change with tax payable to determine income tax expense. s. Determine the change (debit or credit) in the deferred tax liability (or asset) necessary to reach that ending Notice that, under this approach, tax expense is not calculated directly, but rather is the result of the combination of income tax payable and any changes in deferred tax assets and liabilities. In other words, tax expense is a "plug" in the journal entry that is debited or credited to make the rest of the journal entry balance. That perspective will be important throughout this chapter. Tax expense is a "plug" determinet by changes in the tax payable, deferred tax assets, and deferred tax liability Using the 2019 and 2020 income numbers, the change in deferred tax liablity and journal entries to record income taxes for those years would be: Deferred tax liability 11 2019 16 beg. bal. 2020 Income tax expense (to balance) Deferred tax liability (S0 million-12 million) 40 12 Income tax payable ($ 130 million x 40%) 52 Now look at the activity in the deferred tax liability account over the life of the installment receivable. See how the temporary difference originates in 2018 and reverses in 2019 and 2020? Deferred Tax Liability S in millions) 16 2018 (S40 4096) 2019 (S 10 x 40%) 2020 ($30 40%) 0 Balance after 3 vears