Valuation Account At the end of 2016, its first year of operations, Beattie Company reported taxable income of $38,000 and pretax financial income of $34,400. The difference is due to the way the company handles its warranty costs. For tax purposes, Beattie deducts the warranty costs as they are paid. For financial reporting purposes, Beattie provides for a year-end estimated warranty liability based on future expected costs. Beattie is subject to a 35% tax rate for 2016, and no change in the tax rate has been enacted for future years. Based on verifiable evidence, the company decides it should establish a valuation allowance of 30% of its ending deferred tax asset.

Required:

1. Prepare Beattie’s income tax journal entry at the end of 2016.

2. Prepare the lower portion of Beattie’s 2016 income statement.