Assume P3 had a pre-tax financial income of $9,775,000 as well as the following information related to computing deferred taxes for 2020.

• During 2020, the company received $27,500 in interest from municipal bonds.

• Depreciation for MACRS was $450,000 higher than depreciation expense.

• In December 2020, $815,000 was received for work that will be performed by P3 in January 2021.

• The company paid $39,000 in various fines related to state and federal driving violations incurred by their drivers delivering equipment to various amusement parks around the country.

• The company recorded a contingent expense for $1,200,000, related to a lawsuit in which company attorneys believe it is probably that P3 will lose.

• The company paid $41,000 in insurance premiums for life insurance on the CEO. The company is the beneficiary of that policy.

• In December 202, the company received $800,000 in settlement of a lawsuit that originated in 2016. P3 had sued a customer for breach of contract, and to stop the endless legal proceedings agreed to this settlement amount.

• The company recorded $67,000 more in warranty expense than it paid out in 2020.

• Employees exercised 40,000 stock options during 2020. The exercise price of these options was $10 per share. These options had been granted in 2015 and had a 4-year vesting period. At the time they were granted, the estimated value of the grant using the Black-Scholes option pricing model was $890,000.

• P3 received $67,000 more than it recorded in interest revenue associated with leased equipment and paid $34,000 more than it recorded in interest expense associated with leased equipment.

Required: 

• Compute Taxable Income

• Record the appropriate entry for tax expenses related to the above information. Be sure to detail your determination of deferred tax assets and deferred tax liabilities (if any).

• What entry would have been made if P3 assumed only 40% of any deferred tax asset would be realized in future years?

• Assume P3 , at January 1, 2020, had a Deferred Tax Liability Balance of $50,000, based on the above, what would appear related on the 2020 balance sheet related to Deferred Taxes? 

• If in the future P3 experiences a Net Operating Loss when computing taxable income, explain briefly how that would be handled.