PROBLEM 6–4 Playgrounds, Inc., is granted a distribution franchise by Shady Products in Year 1. Operations are profitable until Year 4 when some of the company’s inventories are confiscated and large legal expenses are incurred. Playgrounds’ tax rate is 50% each year (all expenses and costs are tax deductible). Relevant income statement data are (in thousands):

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Sales ............................ $50 $80 $120 $ 100 $200 $400 $500 $600 Cost of sales ................ 20 30 50 300 50 120 200 250 General and administrative ......... 10 15 20 100 20 30 40 50 Pretax income............... $20 $35 $ 50 $(300) $130 $250 $260 $300 Required:

Compute tax expense for each of the Years 1 through 8, and present comparative income statements for these years (assume a 3-year carryback period, a 20-year carryforward period for any losses, and a 100% valuation allowance for the loss carryforward).