ABC Corporation has not adopted ASC 740. Its balance sheet is as follows:

ASSETS:

Fixed Assets $800

Total Assets $800

LIABILITIES AND EQUITY:

Note payable $650

Equity $200

Total Liabilities and Equity $800

Assume a tax rate of 25%. Because of accelerated depreciation, the tax basis of the fixed assets is $100. The book basis of the assets is $800, which is also the fair market value. If ABC sells its assets for $800, can it pay off its note payable with its after tax proceeds?

2. For the Year 1, the following items occurred for ABC Corporation:

ABC recorded book income of $50,000.

ABC has not recorded any income tax expense.

ABC had fines and penalties expenses of $5,000. Assume all fines are imposed by government.

Tax depreciation exceeded book depreciation by $8,000.

ABC established a warranty reserve of $2,000 during the year.

ABC recorded $2,000 of interest income from municipal bonds.

ABCs vacation expense accrual decreased by $4,000 during the year.

Assume a statutory income tax rate of 25 percent.

• What are ABCs permanent book-tax differences?
• What are ABCs temporary book-tax differences?
• What is ABCs current tax liability?
• What is the journal entry to record ABCs current tax liability?
• What is the journal entry to record ABCs deferred tax provision?
• What is the total provision for income tax?