Problem - The following information relates to Baba Inc.'s transactions during 2012:
- 2012 is Baba Inc.'s second year of operation.
- Baba Inc. is a construction company.
- The company employs private enterprise GAAP and uses the future income taxes method.
- In the foreseeable future, taxable income is expected.
- On the income statement, income before taxes was $835000.
- Recent tax rate changes have been enacted as follows: 40% for 2011, 35% for 2012 and future years. The rates were enacted on January 1 each year, respectively.
- Warranty expense for financial reporting purposes was $85000. Actual warranty payouts made during the year were $69000. Warranty liabilities are classified as current on the balance sheet. In 2011, the recorded warranty expense exceeded the actual payouts by $30000.
- Gross profit from construction contracts amounted to $57000, using the percentage of completion method for accounting purposes. The gross profit on construction contracts for tax purposes was $0 because the completed contract method was used and no contracts were completed during the year. In 2011, no construction contracts were begun or completed.
- Depreciation on property, plant, and equipment for financial reporting purposes was $225000. CCA reported on the tax return amounted to $290000. On January 1, 2012, the carrying amount of the property, plant, and equipment was $1000000 and the UCC was $850000.
- $5000 for a private golf course was deducted as a promotional expense in determining net income.
Problems:
1. Prepare all required journal entries to record Baba Inc.'s income taxes for the year ended December 31, 2012.
2. Prepare a partial income statement for 2012, beginning with "Income before income taxes."