ABC, Inc. was organized on January 1, 2020. The company closes the books annually and prepares financial statements on December 31 of each year. In addition, it uses an accrual accounting system.

Book income (before taxes) for 2020 and 2021 is $400,000 and $980,000, respectively. The company's tax rate is 30% for all years.

Temporary and permanent differences between taxable income and book income for 2020 and 2021 are summarized below:

1. On the 2021 income and expense statement, the business reported a $250,000 government penalty.

2. In the income and expense statement for 2021, the company reported the collection of a life policy from one of its senior executives. The company, as a beneficiary of the insurance, received $100,000 in 2021 after the death of the executive.

3. In 2021 the company estimated a contingent debt of $50,000 for a lawsuit that it is likely to lose.

4. The company reported in the Statement of Income and Expenses for 2020 and 2021 $30,000 respectively for interest income. These interests are exempt from taxes.

5. Total sales income for 2020 included $60,000 of installment sales to be collected equally in 2021 and 2022. The 2021 Statement of Income and Expenses does not include any installment sales.

6. Below is a table summarizing the company's depreciation expense reported in the books (straight line) and the payroll (accelerated)

Year Straight line Accelerated

2020 $50,000 $80,000

2021 50,000 75,000

7. On December 25, 2021, the business prepaid $33,000 for a warehouse lease for the period January 1, 2022 through June 30, 2022.

8. During 2020, the company collected $10,000 in advance from its customers. All products were delivered to customers in the first weeks of January 2021.

INSTRUCTIONS: Answer the following questions. Show your computations whenever possible.

REQUIRED 1: Prepare the 2021 reconciliation. Identify in the reconciliation those temporary differences that originate (O) and those that are canceled (C).

REQUIRED 2: Prepare journal entry to record business tax expense for 2021

REQUIRED 3: Indicate the ending balance in the general ledger of the DTA account and the DTL account.