P18.7 (LO 1, 2, 4) Groupwork One Temporary Difference, Tracked 3 Years, Change in Rates, Income Statement Presentation) Crosley Ltd. 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 40% in 2025, and 35% in 2026 and 2027.

The 35% tax rate was not enacted in law until 2026. The accounting and tax data for the 3 years is shown below.

Financial Accounting Tax Return 2025 (40% tax rate)

Income before temporary difference £ 70,000 £70,000 Temporary difference 60,000 20,000 Income £130,000 £90,000 2026 (35% tax rate)

Income before temporary difference £ 70,000 £70,000 Temporary difference –0– 20,000 Income £ 70,000 £90,000 2027 (35% tax rate)

Income before temporary difference £ 70,000 £70,000 Temporary difference –0– 20,000 Income £ 70,000 £90,000 Instructions

a. Prepare the journal entries to record the income tax expense, deferred income taxes, and income taxes payable at the end of each year. No deferred income taxes existed at the beginning of 2025.

b. Explain how the deferred taxes will appear on the statement of financial position at the end of each year.

c. Draft the income tax expense section of the income statement for each year, beginning with “Income before income taxes.”