Problem 1: Computation of taxable income.
The records for Orkin Co. show this data for 2008:
- Gross profit on installment sales recorded on the books was $360,000. Gross profit from collections of installment receivables was $270,000.
- Life insurance on officers was $3,800.
- Machinery was acquired in January for $300,000. Straight-line depreciation over a ten-year life (no salvage value) is used. For tax purposes, MACRS depreciation is used and Orkin may deduct 14% for 2008.
- Interest received on tax exempt Iowa State bonds was $9,000.
- The estimated warranty liability related to 2008 sales was $19,600. Repair costs under warranties during 2008 were $13,600. The remainder will be incurred in 2009.
- Pretax financial income is $600,000. The tax rate is 30%.
Instructions:
(a) Prepare a schedule starting with pretax financial income and compute taxable income.
(b) Prepare the journal entry to record income taxes for 2008.
Problem 2:
ABC Corporation began operation in 2007 and reported pretax financial income of $225,000 for the year. ABC's tax depreciation exceeded its book depreciation by $30,000. ABC's tax rate for 2007 and year thereafter is 30%.
a) In its December 31, 2007 balance sheet, what amount of deferred tax liability should be reported?
b) Prepare a schedule in good form illustrating your answer.
c) Prepare the journal entry for the expense.
Problem 3:
At December 31, 2006, ABC Corporation had a deferred tax liability of $25,000. At December 31, 2007, the deferred tax liability is $42,000. The corporation's 2007 current tax expense is $43,000.
a) What amount should ABC Corporation report as total tax expense?
b) Prepare the December 31, 2007 journal entry to record income tax expense.