The book basis and tax basis of its assets and liabilities

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Reference no: EM13521821

Education Sciences Company, in its first year of operations, has the following differences between the book basis and tax basis of its assets and liabilities at the end of 2007.
Net Book Value on G/L Net Book Value on tax return
Equipment (net) $800,000 $750,000
Estimated warranty liability $150,000 -0-

It is estimated that the warranty liability will be settled in 2008 ($100,000) and 2009 ($50,000). The difference in equipment (net) will result in taxable (deductible) amounts of $(200,000) in 2008, $(150,000) in 2009, and $200,000 in 2010 and 2011. The company has taxable income of $350,000 in 2007. As of the beginning of 2007, the enacted tax rate is 40% for 2007, and 35% for 2008 and thereafter. Education Sciences expects to report taxable income through 2011.

Instructions

  • Prepare the journal entry to record income tax expense, deferred income taxes, and income tax payable for 2007.
  • Indicate how deferred income taxes will be reported on the balance sheet at the end of 2007.


Additional information:
Assume the cost of equipment purchased in 2007 was $1,000,000 and for book purposes is depreciated evenly over 5 years. Assume the warranty liability is all current and the PPE is all long term

Reference no: EM13521821

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