Part (a): No Journal Entry Required

Temporary differences relate to items that are reported differently for accounting purposes (income statement) and tax purposes (tax return). However, these differences will eventually reverse in future periods. In this case, the prepaid expense will be used up in the future, reducing taxable income, and the additional depreciation expense for tax purposes will eventually be reflected in the accounting books. Therefore, no journal entry is required to record the tax provision for these temporary differences as they will naturally even out over time.

Part (b): Noted

The information provided confirms that there were no temporary differences at the beginning of 2024.

Part (c): Noted

The pre-tax accounting income and taxable income for 2024 are noted.

Part (d): Noted

The information confirms there were no permanent differences, which are items that are always reported differently for accounting and tax purposes.

Part (e): Journal Entry to Record Tax Provision for 2024

Here’s the journal entry to record the tax provision for 2024:

Explanation:

• Taxable income (per requirement (c)) = $8,700
• Tax rate (per requirement (e)) = 40%
• Income Tax Expense = Taxable income * Tax rate = $8,700 * 40% = $3,480
• We debit Income Tax Expense to recognize the tax expense for the year in the income statement.
• We credit Income Taxes Payable to reflect the liability for taxes owed to the government.

Deferred Tax Liability in Isaac Incorporated’s 2025 Balance Sheet

Here’s how to calculate the deferred tax liability for Isaac Incorporated in its year-end 2025 balance sheet:

1. Calculate the future taxable amounts:

• 2026: $140 million (sales) * 25% (new tax rate) = $35 million
• 2027: $155 million (sales) * 25% (new tax rate) = $38.75 million
• 2028: $172 million (sales) * 25% (new tax rate) = $43 million

Total future taxable amounts: $35 million + $38.75 million + $43 million = $116.75 million

2. Calculate the temporary difference:

• Collections in 2025: $124 million (sales)
• Recognized income in 2025 for financial reporting (assuming 100% collected in 2025): $124 million (sales)
• Taxable amount collected in 2025: $124 million (sales) * 30% (original tax rate) = $37.2 million

Temporary difference in 2025: $124 million – $37.2 million = $86.8 million

3. Calculate the deferred tax liability:

• Deferred tax liability = Temporary difference * New tax rate

Deferred tax liability: $86.8 million * 25% = $21.7 million

Therefore, Isaac Incorporated would report a deferred tax liability of $21.7 million in its year-end 2025 balance sheet. This represents the future tax impact of the temporary difference created by recognizing income for financial reporting purposes in 2025 but not recognizing the full taxable amount until future collections (2026 and beyond) at the lower tax rate.