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    Computation of Taxable Income and Journal Entries

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    Problem 1
    Computation of taxable income.
    The records for Orkin Co. show this data for 2008:
    ? Gross profit on installment sales recorded on the books was $360,000. Gross profit from collections of installment receivables was $270,000.
    ? Life insurance on officers was $3,800.
    ? Machinery was acquired in January for $300,000. Straight-line depreciation over a ten-year life (no salvage value) is used. For tax purposes, MACRS depreciation is used and Orkin may deduct 14% for 2008.
    ? Interest received on tax exempt Iowa State bonds was $9,000.
    ? The estimated warranty liability related to 2008 sales was $19,600. Repair costs under warranties during 2008 were $13,600. The remainder will be incurred in 2009.
    ? Pretax financial income is $600,000. The tax rate is 30%.

    (a) Prepare a schedule starting with pretax financial income and compute taxable income.
    (b) Prepare the journal entry to record income taxes for 2008.

    Problem 2
    ABC Corporation began operation in 2007 and reported pretax financial income of $225,000 for the year. ABC's tax depreciation exceeded its book depreciation by $30,000. ABC's tax rate for 2007 and year thereafter is 30%.
    a) In its December 31, 2007 balance sheet, what amount of deferred tax liability should be reported?
    b) Prepare a schedule in good form illustrating your answer.
    c) Prepare the journal entry for the expense.

    Problem 3
    At December 31, 2006, ABC Corporation had a deferred tax liability of $25,000. At December 31, 2007, the deferred tax liability is $42,000. The corporation's 2007 current tax expense is $43,000.
    a) What amount should ABC Corporation report as total tax expense?
    b) Prepare the December 31, 2007 journal entry to record income tax expense.

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    Solution Summary

    This solution computes taxable income from numerous purchases, prepares journal entries for stated transactions and calculates the amount reported as total tax expense.