Deferred Tax Asset

Davidson Gasket Inc. computed a pretax financial loss of $15,000 for the first year of its operations, ended December 31, 20Y1. Analysis of the tax and book bases of its liabilities disclosed $55,000 in unearned rent revenue on the books that had been recognized as taxable income in 20Y1 when the cash was received. Also disclosed was $20,000 in warranties payable that had been recognized as expense on the books in 20Y1 when product sales were made but that are not deductible on the tax return until paid.

These temporary differences are expected to reverse in the following pattern.

Year	Rent Earned on Books	Warranty Payments
20Y2	$13,000	$5,000
20Y3	$25,000	$8,000
20Y4	$12,000	$7,000
20Y5	$5,000	0
Totals	$55,000	$20,000

The enacted tax rates for this year and the next four years are as follows:

20Y1	38%
20Y2	36%
20Y3	32%
20Y4	30%
20Y5	30%

1. Prepare journal entries to record income taxes payable and deferred income taxes. Assume there will be sufficient income in each future year to realize any deductible amount. For compound entries, if an amount box does not require an entry, leave it blank.

Record expense

Record deferred taxes

2. Prepare the income statement for Davidson Gasket Inc. beginning with Loss from continuing operations before income taxes for the year ended December 31, 20Y1.

Davidson Gasket Inc.

Partial Income Statement

For the Year Ended December 31, 20Y1

Loss from continuing operations before income

taxes

$

Income taxes on continuing operations:

Current provision

$

Deferred benefit

Net loss

$