Rowberry Company computed a pretax financial loss of $5,000 for the first year of its operations ended December 31, 2008. Included in the loss was $28,000 in uncollectible accounts expense that was accrued on the books in 2008 using an allowance system based on a percentage of sales. For income tax purposes, deductions for uncollectible accounts are allowed when specific accounts receivable are determined to be uncollectible and written off. No accounts receivable have been written off as uncollectible in 2008.
1. Prepare the journal entries necessary to record income taxes for the year. The enacted income tax rate is 40% for 2008 and all future years. Assume that it is more likely than not that future taxable income will be sufficient to allow for the full realization of any deferred tax assets. Accounts Receivable and the related allowance account are reported under current assets on the balance sheet.
2. Repeat (1), assuming that it is more likely than not that future taxable income will be zero before considering the actual bad debt losses in future years.