Tru Developers, Inc., sells plots of land for industrial development. Tru recognizes income for financial reporting purposes in the year it sells the plots. For some of the plots sold this year, Tru took the position that it could recognize the income for tax purposes when the installments are collected. Income that Tru recognized for financial reporting purposes in 2021 for plots in this category was $60 million. The company expected to collect 60% of each sale in 2022 and 40% in 2023. This amount over the next two years is as follows:
2022 $ 36 million
2023 24 million
$ 60 million
Tru's pretax accounting income for 2021 was $105 million. In its income statement, Tru reported interest income of $15 million, unrelated to the land sales, for which the company's position is that the interest is not taxable. Accordingly, the interest was not reported on the tax return. There are no differences between accounting income and taxable income other than those described above. The enacted tax rate is 40 percent.
Management believes the tax position taken on the land sales has a greater than 50% chance of being upheld based on its technical merits, but the position taken on the interest has a less than 50% chance of being upheld. It is further believed that the following likelihood percentages apply to the tax treatment of the land sales ($ in millions):
Amount Qualifying for Installment Sales Treatment Percentage Likelihood of Tax Treatment Being Sustained
$60 20%
50 20%
40 20%
30 20%
20 20%
A. What proportion of the tax of $60 million income from the plot sold on an installment basis will Tru defer on its 2021 tax return?
B. What proportion of the tax of $60 million income from the plot sold on an installment basis will Tru defer in its 2021 financial statements?