Molnar Corporation reported the following results for Year 1, its first year in business:
Taxable income (all taxable at 34%) . . . . . . . . . . . . . . $300,000
Accounting income (income before taxes). . . . . . . . . . $400,000
The difference between taxable income and accounting income resulted from the following:
|
|
Income Statement
|
Income Tax Return
|
|
Depreciation
|
$100,000
|
$150,000
|
|
Profit on installment sales
|
135,000
|
55,000
|
|
Product warranty expense
|
30,000
|
-0-
|
REQUIRED:
1. Reconcile income before taxes to taxable income.
2. Prepare the journal entry to record the taxes for Year 1 assuming the following turnaround on temporary differences and a 34% tax rate for years 2-3 and 40% for years 4-5:
|
Taxable/(Deductible)
|
Years |
| |
2
|
3
|
4
|
5
|
|
Depreciation
|
$15
|
$15
|
$20
|
|
|
Installment Sales Profit
|
25
|
25
|
30
|
|
|
Product Warranty
|
|
|
|
$(30)
|
3. Classify the deferred taxes for balance sheet purposes assuming installment sale receivables are classified as a current asset and product warranty is a long-term liability.