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Computation of Taxable Income

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Computation of taxable income.

The records for Orkin Co. show this data for 2011:

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 10-year life (no salvage value) is used. For tax purposes, MACRS depreciation is used and Orkin may deduct 14% for 2011.

Interest received on tax exempt Iowa State bonds was $9,000.

The estimated warranty liability related to 2011 sales was $19,600. Repair costs under warranties during 2011 were $13,600. The remainder will be incurred in 2012.

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 2011.

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Solution Summary

The solution explains how to calculate the taxable income and how to prepare the journal entry to record the income taxes