Satire Street Vending reported a pretax operating loss of $175,000 for financial reporting purposes in 2013. Contributing to the loss was an estimated loss of $30,000 from accruing a loss contingency. The loss will be tax deductible when paid in 2014. During the year, the company purchased several vending carts at a total cost of $300,000. The carts are expected to have a useful life of three years with no residual value. For financial reporting purposes, the company elects to depreciate the carts on a straight-line basis. For tax purposes, the corresponding depreciation deduction is 60%, 30%, and 10% over the three years beginning in 2013. During 2013, the company also recorded $10,000 in interest revenue from municipal bonds.
There were no temporary differences at the beginning of the year and none originating in 2013 other than those described above. Taxable income was $130,000 in 2011 and $65,000 in 2012. The enacted tax rate is 40%. It was also 40% in the previous two years.
a) prepare the income tax journal entry for 2013. Satire Street elects the carryback option.
b) prepare the journal entry to record income taxes for 2014. Assume pretax income is $150,000 and that recent tax legislation revised the tax rate for 2015 from 40% to 30%. No additional temporary or permanent differences originate in 2014.