Question - The following information is available with respect to Iota Inc. for the years 2014 and 2015:
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2015
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2014
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Net income (loss) before income taxes
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($600,000)
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$750,000
|
|
Warranty expense for the year
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30,000
|
60,000
|
|
Warranty payments during the year
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20,000
|
40,000
|
|
Amortization expense
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80,000
|
80,000
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|
Capital cost allowance claimed
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100,000
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90,000
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|
Meals and entertainment expenses
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40,000
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40,000
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|
Tax rate for the year
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32%
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30%
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At December 31, 2013, Iota Inc. had a deferred tax asset of $6,600 related to its warranty provision on that date of $20,000 and had a deferred income tax liability of $49,500 related to the difference between the carrying value of its amortizable capital assets of $800,000 and its undepreciated capital cost for income tax purposes of $650,000.
Warranty costs are deductible for income tax purposes only when paid. Only 50% of the cost of meals and entertainment may be deducted in arriving at taxable income.
The company reported taxable income during the years 2010 to 2013 of $50,000 each year and paid tax at 33% in each of those years. Tax rates are not known until the year to which they apply.
The management of Iota Inc. believe that they will be able to utilize any tax losses before they expire.
Required:
Prepare the journal entries necessary to record the company's income tax expense for 2014 and 2015.
Prepare a reconciliation between the income tax rate applied to the accounting income before tax and the income tax expense for 2015.