(Five Differences, Compute Taxable Income and Deferred Taxes, Draft Income Statement) Wise Company began operations at the beginning of 2011. The following information pertains to this company.

1. Pretax financial income for 2011 is $100,000.

2. The tax rate enacted for 2011 and future years is 40%.

3. Differences between the 2011 income statement and tax return are listed below:

(a) Warranty expense accrued for financial reporting purposes amounts to $7,000. Warranty deductions per the tax return amount to $2,000.

(b) Gross profit on construction contracts using the percentage-of-completion method per books amounts to $92,000. Gross profit on construction contracts for tax purposes amounts to $67,000.

(c) Depreciation of property, plant, and equipment for financial reporting purposes amounts to $60,000. Depreciation of these assets amounts to $80,000 for the tax return.

(d) A $3,500 fine paid for violation of pollution laws was deducted in computing pretax financial income.

(e) Interest revenue earned on an investment in tax-exempt municipal bonds amounts to $1,500. (Assume (a) is short-term in nature; assume (b) and (c) are long-term in nature.)

4. Taxable income is expected for the next few years.

(a) Compute taxable income for 2011.

(b) Compute the deferred taxes at December 31, 2011, that relate to the temporary differences described above. Clearly label them as deferred tax asset or liability.

(c) Prepare the journal entry to record income tax expense, deferred taxes, and income taxes payable for 2011.

(d) Draft the income tax expense section of the income statement beginning with “Income before income taxes.”