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Intermediate Accounting (Kieso)
Found in: Page 1104

Short Answer

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.”

Liabilities are the type of obligation for an organization where they need to pay the money to its creditors. It is represented under the balance sheet and is used in the accounting equation.

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Step by Step Solution

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

-

(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)

(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

(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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