E17-4. Temporary Differences, Deferred Tax Liability. [Learning Objective 3] Blue Collar Clothing, Inc. acquired a new fabric-cutting machine at the beginning of the current year. The machine cost $600,000 with no residual value expected. Blue Collar uses the straight-line method for financial reporting assuming a 6-year useful life. The firm classifies the equipment as 5-year MACRS property for tax purposes using the following percentages. The table is as follows.

Year MACRS yr1. 20.00 % yr 2. 32.00 % yr3. 19.20 % yr 4. 11.52 % yr 5. 11.52 % yr 6. 5.76 %

The company is subject to a 40% income tax rate and has no other book-tax differences. We present Blue Collars income before tax and depreciation: The table is as follows.

Income before Tax and Depreciation yr 1.$ 850,000 yr 2. $900,000 3. $ 930,000 4. $ 1,100,000 5. 1,400,000 6. 1,850,000

Required (Show all supporting computations.) Prepare all journal entries required to record Blue Collars income tax provision for Years 3 and 4. What is the balance of the deferred tax account at the end of Year 3? What is reported net income for Years 3 and 4?