Nelson Inc. purchased machinery at the beginning of 2017 for $90,000. Management used the straight-line method to depreciate the cost for financial reporting purposes and the sum-of-the- years' digits method to depreciate the cost for tax purposes. The life of the machinery was estimated to be three years, and the salvage value was estimated at zero. Revenues less expenses other than depreciation expense and goodwill impairment equaled $500,000 for 2017, 2018, and 2019. Nelson pays income tax at the rate of 35% of taxable income. The goodwill impairment equaled $50,000 for 2017 and 2018. There was no impairment in 2019.
Required:
1. Compute Nelson's taxable income and financial reporting income (before tax) for all three years.
2. What are permanent and temporary differences? Give an example of each for Nelson.
3. For 2017, 2018, and 2019, determine Nelson's income tax due, income tax expense for the year, and deferred tax asset or liability at December 31. For the last item, be sure to specify whether the item is a deferred tax asset or liability.
4. Assume the federal government changes the tax rate to 30% at the beginning of 2018.
Compute the following:
Income tax due for 2018
Income tax expense for 2018