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# Installment Sales Method for Temporary Difference

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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."

#### 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

## E19-6 Identify Temporary or Permanent Differences

E19-6 (Identify Temporary or Permanent Differences) Listed below are items that are commonly
accounted for differently for financial reporting purposes than they are for tax purposes.
Instructions
For each item below, indicate whether it involves:
(1) A temporary difference that will result in future deductible amounts and, therefore, will usually
give rise to a deferred income tax asset.
(2) A temporary difference that will result in future taxable amounts and, therefore, will usually give
rise to a deferred income tax liability.
(3) A permanent difference.
(a) ______ The MACRS depreciation system is used for tax purposes, and the straight-line depreciation
method is used for financial reporting purposes for some plant assets.
(b) ______ A landlord collects some rents in advance. Rents received are taxable in the period when
(c) ______ Expenses are incurred in obtaining tax-exempt income.
(d) ______ Costs of guarantees and warranties are estimated and accrued for financial reporting
purposes.
(e) ______ Installment sales of investments are accounted for by the accrual method for financial
reporting purposes and the installment method for tax purposes.
(f) ______ For some assets, straight-line depreciation is used for both financial reporting purposes
and tax purposes but the assets' lives are shorter for tax purposes.
(g) ______ Interest is received on an investment in tax-exempt municipal obligations.
(h) ______ Proceeds are received from a life insurance company because of the death of a key officer.
(The company carries a policy on key officers.)
(i) ______ The tax return reports a deduction for 80% of the dividends received from U.S. corporations.
The cost method is used in accounting for the related investments for financial
reporting purposes.
(j) ______ Estimated losses on pending lawsuits and claims are accrued for books. These losses are
tax deductible in the period(s) when the related liabilities are settled.
(k) ______ Expenses on stock options are accrued for financial reporting purposes.

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