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Crosley Corp. sold an investment

Price: $3.99


P19-7 (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 2010, and 35% in 2011 and 2012. The 35% tax rate was not enacted in law until 2011. The accounting and tax data for the 3 years is shown below.

Financial Tax
Accounting Return
2010 (40% tax rate)
Income before temporary difference $ 70,000 $70,000
Temporary difference 60,000 20,000
Income $130,000 $90,000
2011 (35% tax rate)
Income before temporary difference $ 70,000 $70,000
Temporary difference –0– 20,000
Income $ 70,000 $90,000
2012 (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
tax payable at the end of each year. No deferred income taxes existed at the beginning of 2010.
(b) Explain how the deferred taxes will appear on the balance sheet at the end of each year. (Assume
the Installment Accounts Receivable is classified as a current asset.)
(c) Draft the income tax expense section of the income statement for each year, beginning with
“Income before income taxes.”

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