Stratco Corporation computed a pretax financial income of $40,000 for the first year of its operations ended December 31, 2013. Included in financial income was $50,000 of nontaxable revenue, $20,000 gross profit on installment sales that was deferred for tax purposes until the installments were collected, and $50,000 in warranties payable that had been recognized as expense on the books in 2013 when product sales were made. The temporary differences are expected to reverse in the following pattern:
Year _____________________Gross Profit on Collections _________Warranty Payments
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,000 ...................................... $ 9,000
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,000 ....................................... 16,500
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,000 ....................................... 20,500
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,000 .......................................... 4,000
Totals . . . . . . . . . . . . . . . . . . . . . . . . . $20,000 ....................................... $50,000
The enacted tax rates for this year and the next four years are as follows:
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40%
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Instructions:
1. Prepare journal entries to record income taxes payable and deferred income taxes. Assume that there will be sufficient income in each future year to realize any deductible amount.
2. Prepare the income statement for Stratco beginning with Income from continuing operations before income taxes for the year ended December 31, 2013.