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 2014, and 35% in 2015 and 2016. The 35% tax rate was not enacted in law until 2015.

The accounting and tax data for the 3 years is shown below.

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 2014.

(b) Explain how the deferred taxes will appear on the statement of financial position 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.”

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Financial Tax Accounting Return 2014 (40% tax rate) Income before temporary difference Temporary difference 70,000 70,000 60,000 20,000 130,000 90,000 Income 2015 (35% tax rate) Income before temporary difference Temporary difference Income 70,000 -0- 70,000 2016 (35% tax rate) Income before temporary difference 70,000 Temporary difference -0- Income 70,000 70,000 20,000 90,000 70,000 20,000 90,000