(Two Temporary Differences, One Rate, Beginning Deferred Taxes, Compute Pretax Financial Income) The following facts relate to Duncan Corporation.

1. Deferred tax liability, January 1, 2007, $60,000.

Deferred tax asset, January 1, 2007, $20,000.

Taxable income for 2007, $105,000.

Cumulative temporary difference at December 31, 2007, giving rise to future taxable amounts, $230,000.

Cumulative temporary difference at December 31, 2007, giving rise to future deductible amounts,

$95,000.

6. Tax rate for all years, 40%. No permanent differences exist.

7. The company is expected to operate profitably in the future.

eS Instructions

(a) Compute the amount of pretax financial income for 2007.

(b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2007.

(c) Prepare the income tax expense section of the income statement for 2007, beginning with the line

“Income before income taxes.”

(d) Compute the effective tax rate for 2007.