Question

Marin Corp. sold an investment on an installment basis. The total gain of $68,400 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 2020, and 20% in 2021 and 2022. The 20% tax rate was not enacted in law until 2021. The accounting and tax data for the 3 years is shown below.

		Financial Accounting		Tax Return
2020 (40% tax rate)
Income before temporary difference		$79,800		$79,800
Temporary difference		68,400		22,800
Income		$148,200		$102,600
2021 (20% tax rate)
Income before temporary difference		$79,800		$79,800
Temporary difference		0		22,800
Income		$79,800		$102,600
2022 (20% tax rate)
Income before temporary difference		$79,800		$79,800
Temporary difference		0		22,800
Income		$79,800		$102,600

A) Calculate cumulative temporary differences for years 2020-2022.

B)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 2020.

C

Show how the deferred taxes will appear on the balance sheet at the end of each year. D) Draft the income tax expense section of the income statement for each year, beginning with “Income before income taxes.”

Answer 1

Temporary difference is the difference between finance income and taxable income

A) Calculation of cumulative temporary difference for years 2020-2020-

Particulars	2020	2021	2022
Financial Income	148,200	79,800	79,800
Taxable Income	102,600	102,600	102,600
Temporary difference ( Originating)	45,600	(22,800)	(22,800)
Temporary difference at the beginning of period	0	45,600	22,800
Cumulative temporary difference at the end of the year	45,600	22,800	0