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    Reconciliation of financial and taxable income

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    #2 The following differences enter into the reconciliation of financial income and taxable income of A Company for the year ended December 31, 2007, its first year of operations. The enacted income tax rate is 30% for all years.
    Pretax accounting income $700,000
    Excess tax depreciation (320,000)
    Litigation accrual 70,000
    Unearned rent revenue deferred on the books but appropriately
    recognized in taxable income 50,000
    Interest income from New York municipal bonds (20,000)
    Taxable income $480,000

    1. Excess tax depreciation will reverse equally over a four-year period, 2008-2011.
    2. It is estimated that the litigation liability will be paid in 2011.
    3. Rent revenue will be recognized during the last year of the lease, 2011.
    4. Interest revenue from the New York bonds is expected to be $20,000 each year until their maturity at the end of 2011.

    (a) Prepare a schedule of future taxable and (deductible) amounts.
    (b) Prepare a schedule of the deferred tax (asset) and liability.
    (c) Since this is the first year of operations, there is no beginning deferred tax asset or liability. Compute the net deferred tax expense (benefit).
    (d) Prepare the journal entry to record income tax expense, deferred taxes, and the income taxes payable for 2007.

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    Solution Summary

    The solution explains the reconciliation of financial and taxable income and the related journal entries