Interperiod Tax Allocation
Response to the following problem:
Peterson Company has computed its pretax financial income to be $66,000 in 2010 after including the effects of the appropriate items from the following information:
1. Depreciation taken for tax purposes $40,000
2. Officers' life insurance premium expense recorded on accounting records 15,000
3. Interest revenue on investment in municipal bonds recorded on accounting records 25,000
4. Percentage depletion taken for tax purposes in excess of cost depletion taken for financial reporting purposes 10,000
5. Depreciation taken for financial reporting purposes 48,000
6. Actual product warranty costs deducted for tax purposes 20,000
7. Gross profit on installment sales recognized for tax purposes 80,000
8. Estimated product warranty expense recorded on accounting records 27,000
9. Gross profit on installment sales recognized for financial reporting purposes 91,000
The company's accountant has prepared the following schedule showing the future taxable and deductible amounts at the end of 2010 for its three temporary differences:
Future Taxable Amounts Totals
Depreciation difference $33,800
Installment sales: grows profit difference 26,700
Future Deductible Amounts
Warranty difference 56,500
At the beginning of 2010, the company had a deferred tax liability of $12,540 related to the depreciation difference and $4,710 related to the installment sales difference. In addition, it had a deferred tax asset of $14,850 related to the warranty difference. The current tax rate is 30% and no change in the tax rate has been enacted for future years.
Required:
1. Compute the Peterson Company's taxable income for 2010.
2. Prepare the income tax journal entry of the Peterson Company for 2010 (assume no valuation allowance is necessary).
3. Identify the permanent differences in Items 1-9 and explain why you did or did not account for them as deferred tax items in Requirement 2.