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

Question

(One Temporary Difference, Tracked 3 Years, Change in Rates, Income Statement Presentation) 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.

Check the below image for accounting and tax data.

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

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

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