Problem:
Earl Co. at the end of 2004, its first year of operations, prepared a reconciliation between pretax financial income and taxable income as follows:
Pretax financial income $500,000
Estimated expenses deductible for taxes when paid 800,000
Extra depreciation (900,000)
Taxable income $400,000
Estimated warranty expense of $530,000 will be deductible in 2005, $200,000 in 2006, and $70,000 in 2007. The use of the depreciable assets will result in taxable amounts of $300,000 in each of the next three years.
Instructions
1. Prepare a table of future taxable and deductible amounts.
2. Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2004, assuming an income tax rate of 40% for all years.