Inter period Tax Allocation Peterson Company has computed its pretax financial income to be $66,000 in 2007 after including the effects of the appropriate items from the following information:
|
1. Depreciation taken for tax purposes |
$40,000 |
|
2. Officers’ life insurance premium expense recorded on accounting records |
15,000 |
|
3. Interest revenue on investment in municipal bonds recorded on accounting records |
25,000 |
|
4. Percentage depletion taken for tax purposes in excess of cost depletion taken for financial reporting purposes |
10,000 |
|
5. Depreciation taken for financial reporting purposes |
48,000 |
|
6. Actual product warranty costs deducted for tax purposes |
20,000 |
|
7. Gross profit on installment sales recognized for tax purposes |
80,000 |
|
8. Estimated product warranty expense recorded on accounting records |
27,000 |
|
9. Gross profit on installment sales recognized for financial reporting purposes |
91,000 |
The company’s accountant has prepared the following schedule showing the future taxable and deductible amounts at the end of 2007 for its three temporary differences:
|
Totals |
|
|
Future Taxable Amounts |
|
|
Depreciation difference |
$33,800 |
|
Installment sales: gross profit difference |
26,700 |
|
Future Deductible Amounts |
|
|
Warranty difference |
56,500 |
At the beginning of 2007 the company had a deferred tax liability of $12,540 related to the depreciation difference and $4,710 related to the installment sales difference. In addition, it had a deferred tax asset of $14,850 related to the warranty difference. The current tax rate is 30% and no change in the tax rate has been enacted for future years.
Required
1. Compute the Peterson Company’s taxable income for 2007.
2. Prepare the income tax journal entry of the Peterson Company for 2007 (assume no valuation allowance is necessary).
3. Identify the permanent differences in Items 1–9 and explain why you did or did not account for them as deferred tax items in Requirement 2.