Accounting for Income Taxes

1. For 20x7 and 20x8, Doyea reports taxable income and pretax financial income as shown below. Those amounts differed only in the way Doyea reported construction income and depreciation expense.

20x7 20x8 20x9

Taxable income $100,000 $150,000 $120,000

Higher (lower) construction income 60,000 (20,000) (10,000)

Lower (higher) depreciation expense 30,000 10,000 (15,000)

Pre-tax accounting income $190,000 $140,000 $ 95,000

The tax rate applicable to 20x7, 20x8, and 20x9 is 40 percent, 35 percent, and 35 percent, respectively. There were no deferred income tax balances prior to 20x7.

Required:

a. Are the differences reflected above temporary or permanent? Explain.

b. Give the adjusting entry for income taxes at the end of 20x7, 20x8 and 20x9.

c. Discuss the presentation of deferred tax amounts on the balance sheet at December 31, 20x7, 20x8, and 20x9 and of income tax expense on the income statement for the years ended December 31, 20x7, 20x8, and 20x9.

d. Compute Doyeas effective tax rate for 20x7, 20x8, and 20x9.

e. Suppose, in addition to the information above, Doyea earned $50,000 of interest from investment in municipal bonds during 20x8. Discuss the nature of this difference (temporary or permanent). How would this amount affect your answers in (b), (c), and (d)?

Please show steps and calculation. Thanks.