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Installment Sales Method for Temporary Difference

Gators 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 35% in 2003, and 30% in 2004 and 2005. The 30% tax rate was not enacted in law until 2004. The accounting and tax data for the 3 years is shown below.

(see chart in attached file)

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 2003.
(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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Solution Preview

Please see the attached file for complete solution. Thanks

(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 2003.

First calculate the cumulative temporary difference at the year end.
Year 2003 = 130,000-90000=40000
Year 2004 = 70000-90000+40000=20000
Year 2005 = 70000-90000+20000=0

Year 2003:
Income tax expenses = Accounting income*Tax rate = 130,000*35%=45,500
Income tax payable = Taxable income*tax rate = 90000*35%=31500

Journal entry:
Income tax expenses 45,500
Income tax ...

$2.19