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# Schedule of taxable income and journal entries

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Computation of taxable income.

The records for Frish 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 \$2,900.
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 Frish may deduct 14% for 2011.
Interest received on tax exempt Iowa State bonds was \$6,000.
The estimated warranty liability related to 2008 sales was \$19,600. Repair costs under warranties during 2011 were \$13,600. The remainder will be incurred in 2012.
Pretax financial income is \$700,000. The tax rate is 30%.

Instructions

a) Prepare a schedule starting with pretax financial income and compute taxable income.

b) Prepare the journal entry to record income taxes for 2011.

#### Solution Summary

The solution explains how to prepare a schedule of taxable income and the related journal entries

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## Computation of Taxable Income and Journal Entries

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%.

Instructions
(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?