Foxy Inc.'s financial statement and taxable income for Year 1 follows (income before the effect of tax-related differences was $140,000): FINANCIAL STATEMENT PRE-TAX INCOME Differences: Municipal interest income Penalty expense Tax depreciation Book depreciation Excess tax depreciation $ 115,000 (12,000) 7,000 $ 40,000 (30,000) (10,000) INCOME TAX RETURN The enacted tax rate is 40% for this year and future years. TEMPORARY DIFFERENCES Permanent TAX RETURN Income $ 140,000 Municipal interest -0- Penalty -O- $ 140,000 Depreciation * Taxable income * $ Permanent INCOME STATEMENT Income $ 140,000 Municipal interest 12,000 Penalty (7,000) $ 145,000 Depreciation (30,000) Pretax fin. income $ 115,000 40% 40% * $ * $ Journal entry: DR * DR * Income tax expense-current Income tax expense-deferred Income taxes currently payable Deferred tax liability CR * CR