Speedy Company reports the following revenues and expenses to arrive at its pretax financial accounting income for the year ended
December 31, 2016:
Revenues $229,600
Expenses (160,100)
Pretax financial income $ 69,500
The revenues included in pretax financial income are the same as the revenues included in the company's taxable income. Expenses, on the other hand, result in a number of differences:
Depreciation subtracted for financial income exceeded depreciation deducted for income taxes by $11,000.
Insurance premiums on life insurance policies on key company executives deducted for financial income was $15,600.
Warranty costs deducted for income taxes exceeded warranty expenses deducted for financial reporting by $8,900.
Legal expense of $9,800 was accrued and deducted for financial reporting; it will be deducted for income taxes when paid in a future year.
Other than the life insurance premiums, Speedy expects the other three expense differences to result in total future taxable or deductible amounts as follows:
Future Taxable Amounts:
Depreciation expense difference $63,000
Future Deductible Amounts:
Warranty expense difference $48,400
Legal expense difference 9,800
At the beginning of 2016 (AKA: December 31, 2015), Speedy had a deferred tax liability of $22,200 related to the depreciation difference AND a deferred tax asset of $17,190 related to the warranty difference. The income tax rate for 2016 is 35%, but in mid-2016, Congress enacted a 30% rate for 2017 and future years.
Required:
1. Compute Speedy's taxable income for 2016.
2. Prepare Speedy's income tax journal entry for 2016, assuming no valuation allowance is necessary. Use separate deferred tax asset(s) and/or deferred tax liability(ies) for each item (depreciation, warranty, legal).
3. Prepare the lower portion of Speedy's 2016 income statement, as we did in class.