Chapter 19Problem 1:California Surplus Inc. qualifies to use the installment-sales method for tax purposes and soldan investment on an installment basis
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Homework – Week 2 – Chapter 19Problem 1:California Surplus Inc. qualifies to use the installment-sales method for tax purposes and soldan investment on an installment basis. The total gain of $75000 was reported for financialreporting purposes in the period of sale. The installment period is 3 years; one-third of the saleprice is collected in 2014 and the rest in 2015 and 2016. The tax rate was 35% in 2014, 30% in2015, and 30% in 2016. The enacted tax rates of 2015 and 2016 are not known until 2015.The accounting and tax data are shown below.Financial AccountingTax Return2014 (35% tax rate)Income before temporary difference$175,000$175,000Temporary difference$75,000$25,000Income$250,000$200,0002015 (30% tax rate)Income before temporary difference$200,000$200,000Temporary difference$–$25,000Income$200,000$225,0002016 (30% tax rate)Income before temporary difference$180,000$180,000Temporary difference$–$25,000Income$180,000$205,000Required:1)Prepare the journal entries to record the income tax expense,deferred income taxes, and the income taxes payable for2014, 2015, and 2016. No deferred income taxes existed atthe beginning of 2012.2)Explain how the deferred taxes will appear on the balancesheet at the end of each year. (Assume Installment AccountsReceivable is classified as a current asset.)3)Show the income tax expense section of the income statementfor each year, beginning with “Income before income taxes.”
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