Two Differences, 2 Years, Compute Taxable Income and Pretax Financial Income) The following information was disclosed during the audit of Elbert Inc.
2. On January 1, 2010, equipment costing $600,000 is purchased. For financial reporting purposes, the company uses straight-line depreciation over a 5-year life. For tax purposes, the company uses the elective straight-line method over a 5-year life. (Hint: For tax purposes, the half-year convention as discussed in Appendix 11A must be used.)
3. In January 2011, $225,000 is collected in advance rental of a building for a 3-year period. The entire $225,000 is reported as taxable income in 2011, but $150,000 of the $225,000 is reported as unearned revenue in 2011 for financial reporting purposes. The remaining amount of unearned revenue is to be earned equally in 2012 and 2013.
4. The tax rate is 40% in 2010 and all subsequent periods. (Hint: To find taxable income in 2010 and 2011, the related income tax payable amounts will have to be ?ogrossed up.??)
5. No temporary differences existed at the end of 2009. Elbert expects to report taxable income in each of the next 5 years.
(a) Determine the amount to report for deferred income taxes at the end of 2010, and indicate how it should be classified on the balance sheet.
(b) Prepare the journal entry to record income taxes for 2010.
(c) Draft the income tax section of the income statement for 2010 beginning with ?oIncome before income taxes.?? (Hint: You must compute taxable income and then combine that with changes in cumulative temporary differences to arrive at pretax financial income.)
(d) Determine the deferred income taxes at the end of 2011, and indicate how they should be classified on the balance sheet.
(e) Prepare the journal entry to record income taxes for 2011.
(f) Draft the income tax section of the income statement for 2011, beginning with ?oIncome before incometaxes.??
