1. Given the following information about Black, Co., be prepared to explain the calculations in the "Black Company - Support for Question 1" table on page 3 of this assignment. Also, prepare the journal entries for each year to record tax expenses, taxes payable, and deferred taxes. I have provided you with all the supporting calculations, but I will expect you to be prepared to explain these calculations to the class. The firm uses sum of the year's digits depreciation for tax purposes and straight line for the books. It started business in 1994 and purchased one asset in 1994 and another in 1995. Those are its only depreciable assets.

The supporting calculations for this question are on the following page. Let me explain a few items on the spreadsheet to help you understand why I structured it the way I did.

• I laid out the spreadsheet top to bottom to follow the basic approach GAAP uses to calculate a firm's income tax expense. That is, I begin with Black's the tax liability and then adjust for temporary tax differences.
• I separated the calculations for each asset so that you can track the reversals for each. In fact, this is what firms need to do to calculate their annual tax expense. That is, they need to track each asset, or asset class, if they lump them to calculate depreciation, separately to determine when tax effects will reverse.

Use the table below to record your journal entries based on the data above. There are four possible accounts involved in each year: Deferred Income Tax Assets, Deferred Income Tax Liabilities, Income Tax Expense, and Income Taxes Payable. Deferred Income Tax Assets and Deferred Income Tax Liabilities must be kept separate in the accounting, but not all four accounts may be involved in every year.

Account	Debit	Credit
1994
Totals

1995
Totals

1996
Totals

1997
Totals

2. Now calculate Black's effective tax rate for each year and compare it to their statutory rate. Why is their affective tax rate in 1994 different from their statutory rate but not in the other years?

Black Company - Support for Question 1 1996 Row 1994 1995 1997 Comment 1 Tax rates 35% 35% 35% 35% From Case 2 Income taxes payable per tax return $ 7,500 $ 15,200 $ 2,400 $ 31,500 From Case Depreciation Adjustments Asser #7 3 Depreciation Expense Difference 4 Tax Effect for Asset 41 $ 3,000 S 1,000 $ 350 $ (1,000) S (3.000) From depreciation schedule (350 (1.050) Row 3 times Row 1 $ 1,050 $ 5 Asser #2 6 Depreciation Expense Difference 7 Tux effect for Asset #2 $ 4.500 5 1,575 1,500 $ (1.500) From depreciation schedule 525 (525) Row 6 times Row 1 8 Rent received in 1994 9 Tax Effect From Case $2.000 $ $ (700) S 2.000 700 Row 8 times now! 10 Pines and political contributions 11 Tax Fffect 5.000 1.750 $ From Case Row 10 times row 1 $ 7,500 $ 1,050 15,200 $ 350 12 Summary of tax adjustments 13 Total Taxes Payable 14 Asset 1 Frfect 15 Asset #2 Fffect 16 Total Depreciation Exfect 17 Rent Effect Floes and Political Contributions Effect Book Tux Expense 1,050 (700) 1.575 1.925 700 2,400 S 31,500 From case (350) (1,050) Row 4 525 (525) Row 7 175 (1.575) Sum of rows 14 and 15 Row 9 This is a permanent tax difference 2.575 S 29,925 Sum of rows 13, 16, and 17 S 7.850 $ 17,825 Black Company - Support for Question 1 1996 Row 1994 1995 1997 Comment 1 Tax rates 35% 35% 35% 35% From Case 2 Income taxes payable per tax return $ 7,500 $ 15,200 $ 2,400 $ 31,500 From Case Depreciation Adjustments Asser #7 3 Depreciation Expense Difference 4 Tax Effect for Asset 41 $ 3,000 S 1,000 $ 350 $ (1,000) S (3.000) From depreciation schedule (350 (1.050) Row 3 times Row 1 $ 1,050 $ 5 Asser #2 6 Depreciation Expense Difference 7 Tux effect for Asset #2 $ 4.500 5 1,575 1,500 $ (1.500) From depreciation schedule 525 (525) Row 6 times Row 1 8 Rent received in 1994 9 Tax Effect From Case $2.000 $ $ (700) S 2.000 700 Row 8 times now! 10 Pines and political contributions 11 Tax Fffect 5.000 1.750 $ From Case Row 10 times row 1 $ 7,500 $ 1,050 15,200 $ 350 12 Summary of tax adjustments 13 Total Taxes Payable 14 Asset 1 Frfect 15 Asset #2 Fffect 16 Total Depreciation Exfect 17 Rent Effect Floes and Political Contributions Effect Book Tux Expense 1,050 (700) 1.575 1.925 700 2,400 S 31,500 From case (350) (1,050) Row 4 525 (525) Row 7 175 (1.575) Sum of rows 14 and 15 Row 9 This is a permanent tax difference 2.575 S 29,925 Sum of rows 13, 16, and 17 S 7.850 $ 17,825