Task:
(One Temporary Difference, Tracked 3 Years, Change in Rates, Income Statement Presentation)
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.
Financial Tax
Accounting Return
2003 (35% tax rate)
Income before temporary difference $ 70,000 $70,000
Temporary difference 60,000 20,000
Income $130,000 $90,000
2004 (30% tax rate)
Income before temporary difference $ 70,000 $70,000
Temporary difference -0- 20,000
Income $ 70,000 $90,000
2005 (30% tax rate)
Income before temporary difference $ 70,000 $70,000
Temporary difference -0- 20,000
Income $ 70,000 $90,000
Instructions:
(1) 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.
(2) 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.)
(3) Draft the income tax expense section of the income statement for each year, beginning with “Income before income taxes.”