$1$

$.$

$$Charlotte$,$ Inc. began business on January

$1$

$,$

$2$

$0$

$2$

$2$

$.$

$$ Its pretax financial income for the first two years was as follows:

$2$

$0$

$2$

$2$

$$ $

$6$

$4$

$0$

$,$

$0$

$0$

$0$

$2$

$0$

$2$

$3$

$6$

$8$

$0$

$,$

$0$

$0$

$0$

The following items caused the only differences between pretax financial income and taxable income.

i

$.$

$$In

$2$

$0$

$2$

$2$

$,$

$$the company terminated a top executive and agreed to

$1$

$5$

$0$

$,$

$0$

$0$

$0$

$$of severance pay. The amount will be paid $

$5$

$0$

$,$

$0$

$0$

$0$

$$per year for

$2$

$0$

$2$

$2$

$-$

$2$

$0$

$2$

$4$

$.$

$$The

$2$

$0$

$2$

$2$

$$and

$2$

$0$

$2$

$3$

$$payments were made. For financial statement purposes, the $

$1$

$5$

$0$

$,$

$0$

$0$

$0$

$$was expensed in

$2$

$0$

$2$

$2$

$.$

$$For tax purposes, the severance pay is deductible as it is paid.

ii

$.$

$$In

$2$

$0$

$2$

$2$

$,$

$$the company reported depreciation expense in its financial statements of $

$7$

$5$

$,$

$0$

$0$

$0$

$.$

$$ Depreciation expense for tax purposes was

$1$

$2$

$5$

$,$

$5$

$0$

$0$

$.$

$$ The difference will reverse evenly over the next three years

$($

$2$

$0$

$2$

$3$

$-$

$2$

$0$

$2$

$5$

$)$

The tax rate in

$2$

$0$

$2$

$2$

$$is

$2$

$5$

$\%$

$$and no tax rate changes have been enacted that affect the years

$2$

$0$

$2$

$3$

$$

$2$

$0$

$2$

$5$

$.$

$$

Required:

a

$.$

$$Determine taxable income for

$2$

$0$

$2$

$2$

$$and

$2$

$0$

$2$

$3$

$.$

b

$.$

$$Determine the deferred income taxes at the end of

$2$

$0$

$2$

$2$

$,$

$$and prepare the journal entry to record income taxes for

$2$

$0$

$2$

$3$

$.$

c

$.$

$$Determine the deferred income taxes at the end of

$2$

$0$

$2$

$3$

$,$

$$and prepare the journal entry to record income taxes for

$2$

$0$

$2$

$3$

$.$

d

$.$

$$Prepare the Income Tax section of the income statement, starting with Pretax Net Income and ending with Net Income after Taxes for both

$2$

$0$

$2$

$2$

$$and

$2$

$0$

$2$

$3$

$.$