Halsted Manufacturing Inc. began operations in 1996. In 2001, the company became a publicly-held. Ernie Elser, controller, is preparing the 2015-2016 comparative annual financial statements and has gathered the following information pertaining to the accounting for income taxes. For the years ended December 31, 2015 and 2016, Halsted has reported the following revenues and expenses Revenues Cost of goods sold Other revenue Operating expenses Other revenue Loss of disposal of a segment Dec 31, 2015 $6,049,000 2,317,000 1,773,200 18,200 261,000 Dec 31, 2016 $5,867,000 2,149,000 1,772,000 250,000 18,700 (No tax information is contained in these figures.) Tax rates enacted as of the beginning of 2015 are 2014, 40%, 2015, 40%, 2016 - 38 %, 2000 and beyond 35%. Halsted Electric, Inc. uses the calendar year for both financial statement and income tax reporting In 2015, one of the company's delivery trucks was involved in an accident. A lawsuit was instituted against Halsted. At the end of the year, the company attorneys stated that was probable that Halsted would lose, and they believed that the judgement would be approximately $158,000. The case settled in November of 2016 for $175,000. Halsted insures its key officers. The premiums on these policies was $58,200 per year from 2015 through 2018 Schedules of depreciation expense for assets acquired in 1996. At the end of each asser's useful life the residual value for these assets will be zero. December 31 Financial Statement Income Tax Depreciation Year ended Depreciation 2013 187,500 300,000 2014 187,500 480,000 2015 187,500 288,000 2016 187,500 172,800 2017 187,500 172,800 2018 187,500 86,400 2019 187,500 2020 187,500 Halsted received interest on State of Illinois bonds in the following amounts: 2014. $17,500, 2015, $18,200 & 2016, $18,700. After a careful review of all available evidence in 2015, Elsner determined that it is more likely than not that 10% of the 2015 deferred tax asset will not be realized. After a careful review of all available evidence in 2016, Elsner determined that the 2016 deferred tax asser will be realized REQUIRED H Identify each of the 2015 and 2016 financial statement and income tax reporting differences listed above for Halted Electric, Inc. as either temporary or permanent differences. Explain your B. C D. E F For the year ended December 31, 2015 and 2016, compune Halmed's rouble income and income tax liability For the years ended December 31, 2015 and 2016, calculate the deferred tax that relates to the differences identified in Requirement A Prepare the journal entries roquined from the above information for Halsted Electric, Inc. for the years ended December 31, 2015 and 2016 Draft the 2015 and 2016 Income Statements beginning with the line Income before Income Tax Indicate the presentation of Deferred Tax and red hem on the Balance Sheet for December 31, 2015 and 2016 NOTE YOU MUST SHOW ALL OF YOUR COMPUTATIONS. Requirement A The permanent differences are the following 9. Life insurance premiums on key office. Not ever tax deductible) 10. Interest on Illinois State bonds. Not ever table) The above items are recognized on the income statement, but not the tax The temporary differences are the following 1. Accrual for litigation (Funire deductible amount Oves rise to a deferred t 2. Depreciation (Future taxable amount Gives rise to a deferred tax liability. The above items appear on the income statement and the run, but in different years AB 1 Requirement B 2 Dr/(Cr) C E G H 3 4 Halsted Manufacturing Inc. Schedule of Financial to Taxable Income & Tax Liability - M1 5 For Years Ended December 31 2015 2016 6 Financial Statement Income 7 Revenue (6,049,000) (5,867,000) 8 Cost of goods sold 2,317,000 2,149,000 9 10 11 Gross profit Operating expenses Operating income (3,732,000) (3,718,000) Tax rates 1,773,200 1,772,000 2013 40% (1,958,800) (1,946,000) 2014 40% 12 Other revenue (250,000) 2015 40% 13 Interest revenue (18,200) (18,700) 2016 38% 14 Income from continuing operations (1,977,000) (2,214,700) 2017 35% 15 Loss on disposal of a segment 261.000 2018 35% 16 Income before tax (1,716,000) (2,214,700) 2019 35% 17 Permanent differences 2020 35% 18 Interest on Illinois bonds 18,200 18,700 2021 35% 19 Premiums on insurance (58.200) (58,200) 2022 35% 20 (1,756,000) (2,254,200) 21 Temporary differences 22 Law suit difference (158,000) 158,000 23 Depreciation difference 100,500 (14,700) 24 Taxable income (1,813,500) (2,110,900) 25 Tax rate 26 Tax payable 40% (725,400) 38% (802,142) 27 1 Requirement C-1 2 3DelCr) Halsted Manufacturing Inc. Deferred Tax Liability Calculation Depreciation Expense N S Depreciation Deferred Tax 7 For 2003 assets 2013 2014 2015 2016 2017 2018 2019 2020 Year De Cr) Balance 8 Tax Return Deduction 300,000 480.000 288,000 172.00 172.000 $6,400 1,500,000 2013 (20,166) (20,166) Less Financial Statement Expense 187,500 187.500 187,500 187.500 187.500 187.500 187,500 187,500 1,500,000 10 Temporary Difference 112.500 292.500 100,500 (14,700) (14,7001 11 Tax Rate 12 Deferred Tax Ending Balance (20,166) 40% 117,000 40% 40.200 38% (5,586) 35% (5.145) (101,100) 35% (35.345) (187,500) 35% (65.625) (187,500) 39% (65,625) 2014 (117,000) (137,166) 2015 2016 5.586 (171,780 (40,200) (177,366) 13 Deferred Tax Beginning Balance 14 Change in Deferred Tax (20,166) Long-term liability 15 16 17 Depreciation 18 For 2003 assets 2013 2014 2015 2016 2017 2018 2019 2020 19 Tax Return Deduction 300,000 480,000 28.000 172.300 172.800 86,400 1,500,000 20 Less: Financial Statement Expense 187,500 187,500 187.500 187,500 187,500 187,300 21 Temporary Difference 112,500 292,500 100,500 (14,700) (14,700) 22 Tax Rate 40% 3896 23 Deferred Tax Ending Balance (137,166) 40,200 35% (5.145) (101,100) 35% (35.385) 187,500 (187,500) 39% 165,625) 187,500 1500,000 (187.500) 35% (65.625) 24 Deferred Tax Beginning Balance (20,166) 25 Change in Deferred Tax (117000) Long-term liability 20 27 28 Depreciation 2013 2014 2015 2016 2017 2018 2019 2020 30 Tax Return Deduction 300,000 480.000 288,000 172.300 172.00 5 Less Financial Statement Expense 187.500 187,500 187.500 187,500 187.500 400 187.500 500,000 32 Temporary Difference 112.500 292.300 100.500 (14,700) Tax Rate Deferred Tax Ending Balance 35 Deferred Tax Beginning Balance (177,366) 38% (5386) (14,700) 13% (5145) (101,100) 187,500 187.500) 187.500 (187300) 500 000 39% HALLS 35% (65633) 165.635) (137.166) Change in Deferred Tax (4000) Long-term liability 37 Depreciation 40for 2003 2015 2014 2015 Tax Return Deduction 300,000 480.000 42 Less Financial Statement Expense 187.500 187.500 187.500 2016 172.300 187.500 2017 2018 2019 2020 172.300 187,500 Temporary Difference 112.500 292.500 100.500 (14,700) (14,700) 45 Deferred Tax Ending Balance (171,780) 35% (5145) 86,400 187,500 (101,100) 35% 187.500 (147.5001 19% (65.635) 187.500 (187,500) 1,300.000 1,500,000 (65695) 40 Deferred Tax Beginning Balance 47 Change in Delened Tax (177366) 5366 Long-term liability 1 Requirement C-2 2 3 Dr/(Cr) 4 5 6 7 Law Suit A B D E F G H Halsted Manufacturing Inc. Deferred Tas Asset Calculation Law Suit 8 For 2005 Law Suit 2015 2016 2017 9 Tax Return Deduction 10 Less: Financial Statement Expense 158,000 158,000 158,000 158,000 11 Temporary Difference. (158,000) 158,000 0 12 Tax Rate 38% 13 Deferred Tax Ending Balance 60,040 60,040 Current 14 Deferred Tax Beginning Balance 0 15 Change in Deferred Tax 60,040 16 17 18 Law Suit 19 For 2005 Law Suit 2015 2016 2017 20 Tax Return Deduction 175,000 175,000 21 Less: Financial Statement Expense 158,000 17,000 175,000 22 Temporary Difference (158,000) 158,000 0 0 23 Tax Rate 35% 24 Deferred Tax Ending Balance 0 25 Deferred Tax Beginning Balance 26 Change in Deferred Tax 60,040 (60,040) Deferred Tax Year Dr/(Cr) Balance 2015 60,040 60,040 2016 (60,040) 0 1 Requirement D 2 Dr/(Cr) 3 4 B Halsted Manufacturing Inc. Journal Entries C D E F 5 2015 2016 6 Dec 31 Income tax expense (net of tax saving) 705,560 856,596 7 Deferred tax law suit 60,040 (60,040) 8 Deferred tax-depreciation (40,200) 5,586 9 Income tax payable (net of tax saving) (725,400) (802,142) 10 11 Dec 31 Income tax expense 6,004 (6,004) 12 Allowance to reduce Deferred Tax Asset 13 to Expected Realizable Value (6,004) 6,004 14 15 16 a 17 18 A 1 Requirement E 2 dr/(er) 3 4 5 6 7 Income before Income tax 8 Provision for taxes Halsted Manufacturing Inc. Partial Income Statement For the Years Ended December 31 9 10 Current provision Deferred 11 Income from Continuing Operations 12 Segment Disposal E F 2015 (1.977,000) 2016 (2,214,700) 829,800 802,142 (13,836) 815,964 (1,161,036) 48,450 850,592 13 Loss on disposal (net) 14 Net Income 156,600 (1,004,436) (1,364,108) 15 16 17 Loss on disposal 18 Tax savingsx @ 40% 261,000 (104,400) 19 Loss net of tax 156,600 20 21 Payable Expense 22 Current provision for income tax (725,400) 705,560 Payable (802,142) Expense 856,596 23 6,004 (6,004) 24 711,564 25 Tax savings @ 40% (104,400) 104,400 26 Current provision for income t 27 on income before tax (829,800) (802,142) 28 Deferred taxes for the period: 29 Depreciation (40,200) 5,586 32 30 Law suit 31 Allowance to reduce Deferred Tax Asset 33 Income tax expense 60,040 (60,040) (6,004) 6,004 13,836 (48,450) (815,964) 815,964 (850,592) $50,592 Requirement E Halsted Manufacturing Inc. Requirement D Dr (Cr) Partial Income Statement For the Years Ended December 31 Journal Entries 2015 2016 2015 2016 Income before income tax (1,977,000) (2.214,700) Dec 31 Income tax expense (net of tax saving) Deferred tax-law suit 705.360 856.396 60,040 60,040) Provision for taxes Deferred tax-depreciation (40.200 5.586 Current provision 829,300 Deferred (13,836) 802.142 48,450 Income tax payable (net of tax saving) 1700) (802,142) 850.592 1 Income from Continuing Operations (1,161,036) Dec 31 Income tax expense 6,004 (6,004) Segment Disposal Loss on disposal (net) 156.600 Allowance to reduce Deferred Tax to Expected Realizable Valy 6.004 Net Income 004.436) (1,364,108) Loss on disposal 261,000 Tax savingx40% 104,400 | latest tetan 156.600 Payable Expense Current provision for income tax (725,400 705,360 6,004 Payable (802.142) Expense 56.596 (6,004) 711364 Tax savings 40% 104,400 104,400 Current provision for income tax on income before tax 021425 Deferred taxes for the period Depreciation Allowance to reduce Deferred Tax Asset Income tax expense (40,200) 60040 (6,004) (45.430) (815,964) 815,964 $50.942 5,586 (60.040) 6,004 AB 1 Requirement B 2 Dr/(Cr) C 3 4 Halsted Manufacturing Inc. Schedule of Financial to Taxable Income & Tax Liability - MI E G H 5 For Years Ended December 31 2015 2016 6 Financial Statement Income 7 8 9 10 11 Revenue Cost of goods sold Gross profit Operating expenses Operating income (6,049,000) (5,867,000) 2,317,000 2,149,000 (3,732,000) (3,718,000) Tax rates 1,773,200 1,772,000 2013 40% (1,958,800) (1,946,000) 2014 40% 12 Other revenue (250,000) 2015 40% 13 Interest revenue (18,200) (18,700) 2016 38% 14 Income from continuing operations (1,977,000) (2,214,700) 2017 35% 15 Loss on disposal of a segment 261,000 2018 35% 16 Income before tax (1,716,000) (2.214,700) 2019 35% 17 Permanent differences 2020 35% 18 Interest on Illinois bonds 18,200 18,700 2021 35% 19 Premiums on insurance (58.200) (58,200) 2022 35% 20 (1,756,000) (2,254,200) 21 Temporary differences 22 Law suit difference (158,000) 158,000 23 Depreciation difference 100,500 (14,700) 24 Taxable income (1,813,500) (2,110,900) 25 Tax rate 26 Tax payable 40% (725,400) 38% (802,142) 27 A 1 Requirement F 2 dr/(cr) B 3 4 5 6 Halsted Manufacturing Inc. Balance Sheet December 31 2015 7 Current Asset 8 Deferred Tax 60,040 9 Less: Allowance to reduce 10 deferred tax asset (6,004) 54,036 11 12 13 Current Liabilities D E 2016 14 Taxes payable (725,400) (802,142) 15 16 Long-term Liabilities 17 Deferred Tax (177,366) (171,780) 18