Question

Crosley Corp. sold an investment on an installment basis. The total gain of $60,000 was reported for financial reporting purposes in the period of sale. The company qualifies to use the installment-sales method for tax purposes. The installment period is 3 years; one-third of the sale price is collected in the period of sale. The tax rate was 40% in 2017, and 35% in 2018 and 2019. The 35% tax rate was not enacted in law until 2018. The accounting and tax data for the 3 years is shown below.

	Financial Accounting	Tax Return
2017 (40% tax rate)
Income before temporary difference	$?70,000	$70,000
Temporary difference	??60,000	?20,000
Income	$130,000	$90,000
2018 (35% tax rate)
Income before temporary difference	$?70,000	$70,000
Temporary difference	??????-0-	?20,000
Income	$?70,000	$90,000
2019 (35% tax rate)
Income before temporary difference	$?70,000	$70,000
Temporary difference	??????-0-	?20,000
Income	$?70,000	$90,000

Instructions

(a)  

Prepare the journal entries to record the income tax expense, deferred income taxes, and the income taxes payable at the end of each year. No deferred income taxes existed at the beginning of 2017.

(b)  

Explain how the deferred taxes will appear on the balance sheet at the end of each year.

(c)  

Draft the income tax expense section of the income statement for each year, beginning with “Income before income taxes.”

Answer 1

	2017	2018	2019
Revenue in Financial reporting	60000
Revenue for tax purposes	20000	20000	20000
Difference	40000	-20000	-20000
Net timing differences	40000	20000	0
Tax rate	40%	35%	35%
Deferred tax liability at the end of the year	16000	7000	0
Requirement 1					Amount in $
	Date	General Jounral			Debit	Credit
	2017	Income tax expense			52000
			Income taxes payable			36000
			Deferred tax Liability			16000
		To record the income tax expense
	2018	Income tax expense			22500
		Deferred tax asset			9000
			Income taxes payable			31500
		To record the income tax expense
	2019	Income tax expense			24500
		Deferred tax asset			7000
			Income taxes payable			31500
		To record the income tax expense
Requirement 2	2017 Balance sheet(partial)
	Asset
	Current asset
	Deferred Tax Asset		0
	Liability
	Current Liabilities
	Deffered tax Liability		8000
	Long term Liability
	Deffered tax Liability		8000
	2018 Balance sheet(partial)
	Asset
	Current asset
	Deferred Tax Asset		9000
	Liability
	Current Liabilities
	Deffered tax Liability		16000
	Long term Liability
	Deffered tax Liability		0
	Asset
	Current asset
	Deferred Tax Asset		16000	OR 0
	Liability
	Current Liabilities
	Deffered tax Liability		16000	OR 0
	Long term Liability
	Deffered tax Liability		0
Requirement 3	Income Statement for 2017(partial)
	Pretax Financial Income			130000
	Less : Income tax expense
		Deffered taxes		16000
		Income taxes		36000
	Net Income			78000
	Income Statement for 2018(partial)
	Pretax Financial Income			70000
	Less : Income tax expense
		Deffered taxes		-9000
		Income taxes		31500
	Net Income			47500
	Income Statement for 2019(partial)
	Pretax Financial Income			70000
	Less : Income tax expense
		Deffered taxes		-7000
		Income taxes		31500
	Net Income			45500