Farley, Inc. began operations in 2002. In 2011, the company became a publicly-held. George

Blanda, controller, is preparing the 2018 annual financial statements and has gathered the following

information pertaining to the accounting for income taxes. For the two years ended December 31,

2018, Farley, Inc., Inc. reported the following revenues and expenses. (No tax information is contained

in these figures.)

Dec 31, 2017 Dec. 31, 2018

Revenues $1,420,000 $1,610,000

Cost of goods sold 438,000 581,000

Operating expenses 326,000 387,000

Other revenue 27,000 27,000

-Tax rates enacted as of the beginning of 2014 are: 2014, 2015, 2016 & 2017, 40%; 2018, 20%;

2019,30% and 2020 & beyond 35%.

-Farley, Inc., Inc. uses the calendar year for both financial statement and income tax reporting.

-Blanda reviewed the open installment sales contracts to determine gross profits acquired on contracts.

During 2017, Farley, Inc. completed 8 contracts with a total gross profit of $250,000 for financial reporting

purposes, whereas only $50,000 of gross profit on installment sales was reported on the 2017 tax return.

The future collection on installment receivables is expected to be $50,000 each year over the course of the

next four years. The installment sale were not made during 2018, but collections on the 2017 contracts

continued to be collected on schedule.

-Farley, Inc., Inc. insures its key officers for death and accidents. The premium on this policy is

$21,000 per year. The premium is expected to remain the same through 2018. During 2018, the

company had received $90,000 check in settlement of a claim against the policy.

-Farley, Inc. collected $45,000 in rent on a building it owns. The rent is for a 5 year period

beginning January 1, 2017.

In 2017, two hundred appliances were sold with a standard three-year warranty option. Morgan's cost

accountant, Wayne DeBach, estimated warranty cost per refrigerator at $70 based on past experience. In

conjunction with the preparation of year-end financial statements, DeBach estimated remaining warranty

expenses would be settled with the following amounts:

Year Amount

2017 $3,000

2018 4,300

2019 6,700

For financial purposes, warranty expenses are recognized at the point of sale, and for tax purposes at the

time paid.

-E. Clapton, production superintendent recently spoke with the plant manager concerning the

status of some of the production equipment. He asked if a new system could be purchased. On

January 8, 2016, Steve Miller, the plant manager, agreed with Clapton and purchased a new

conveyor belt unit for $85,500 with no salvage value. Steve estimated the useful life to be 9

years. For financial purposes, the equipment was depreciated using the straight-line method and

for tax purposes, the machine was depreciated using the following MACRS table:

7-year equipment

14.29%

24.49%

17.49%

12.49%

8.93%

8.92%

8.93%

4.46%

REQUIRED:

A.Identify each of the financial statement and income tax reporting differences listed above for

Farley, Inc., Inc. as either temporary or permanent differences. Explain your answer.

B.For the years ended December 31, 2017 & 2018, compute Farley, Inc., Inc. taxable income and

income tax liability.

C.For the years ended December 31, 2017 & 2018, calculate the deferred tax that relates to the

differences identified in Requirement A.

D.Prepare the journal entries required from the above information for Farley, Inc., Inc. for the years

ended December 31, 2017 & 2108.

E.Indicate the presentation of Deferred Tax and related items on the Balance Sheets for December

31, 2017 & 2018.

F.Indicate the presentation of Deferred Tax and related items on the Income Statements for the

years ended December 31, 2017 & 2018.