Question
At the end of its first year of operations on December 31, 2018, the Skyway Company reported taxable income of $30,000 and a pretax financial
At the end of its first year of operations on December 31, 2018, the Skyway Company reported taxable income of $30,000 and a pretax financial loss of $40,000. Differences between taxable income and pretax financial income included:Environmental fine from the EPA = $20,000Warranty costs expensed for accounting purposes in excess of cash paid for warranty costs = $50,000(Those warranty costs are expected to be paid in 2019.) The enacted tax rates for 2018 and 2019 are 30% and 34%, respectively.REQUIRED:(a) Prepare the income tax journal entry for the Skyway Company on December 31, 2018, assuming that it is more likely than not the deferred tax asset will be realized.(b) Prepare the income tax journal entry for the Skyway Company on December 31, 2018, assuming that it is more likely than not that 40% of the deferred tax asset will not be realized.
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