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

Step by step solution

01

Computation of cumulative temporary difference at the end of each year

Particulars	2017	2018	2019
Pretax financial income	$130,000	$70,000	$70,000
Less: Taxable income	$90,000	$90,000	$90,000
Temporary difference	$40,000	($20,000)	($20,000)
Cumulative difference at the beginning	-	$40,000	$20,000
Cumulative difference at the end	$40,000	$20,000	-

02

(a) Journal Entry

Crosley Corp.
Journal Entry
Date	Particulars	Debit	Credit
2017	Income tax expense	$52,000
	Income tax payable		$36,000
	Deferred tax liability		$16,000
	(To record the income tax expense)
2018	Deferred tax liability	$2,000
	Income tax expense		$2,000
	(To record the tax liability)
2018	Income tax expense	$24,500
	Deferred tax liability	$7,000
	Income tax payable		$31,500
	(To record the tax payable)
2019	Income tax expense	$24,500
	Deferred tax liability	$7,000
	Income tax payable		$31,500
	(To record the tax payable)

03

(b) Balance sheet

Crosley Corp.
Balance sheet
December 31, 2017
Liabilities	Amount
Current liabilities
Deferred tax liability	$16,000
December 31, 2018
Liabilities	Amount
Current liabilities
Deferred tax liability	$7,000

04

(c) Income tax expense section

Crosley Corp.
Income Statement
December 31, 2017
Particulars		Amount
Income before income taxes		$130,000
Less: Income tax expense
Current	$36,000
Deferred	$16,000	$52,000
Net Income		$78,000
December 31, 2018
Particulars		Amount
Income before income taxes		$70,000
Less: Income tax expense
Current	$31,500
Deferred	($7,000)
Adjustment	($2,000)	$22,500
Net Income		$47,500
December 31, 2019
Particulars		Amount
Income before income taxes		$70,000
Less: Income tax expense
Current	$31,500
Deferred	($7,000)	$24,500
Net Income		$45,500

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