Crosley Corp. sold an investment on an installment basis. The total gain of $60,
ID: 2515821 • Letter: C
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.”
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
Explanation / Answer
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
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