Kent Wesley is a junior member of the external audit team hired to audit Aldridge Inc.'s Year 2 financial statements. Kent has been tasked with reviewing differences related to Aldridge's financial statements versus its tax forms from Year 1 in order to prepare for the Year 2 audit. After reading through the workpapers gathered from the company's financial reporting group, Wesley prepares notes shown in the exhibit to discuss with his manager.

Use the information contained in the exhibit to fill out the tables below. Select the answers from the option lists provided.

1. For each of the items listed above, populate the table below:

ABC1Item

Temporary or

Permanent Difference

Deferred Tax Asset

(DTA) or Deferred Tax

Liability (DTL)

2Depreciation

3Life insurance payout

4Fine to the IRS

5Royalties received

6Bad debt expense

2. What is the journal entry associated with the transactions above for Year 1?

Account Name

Debit

Credit

Income Tax Expense

Change in DTA

Change in DTL

Income Tax Payable

3. What is the journal entry associated with the transactions above for Year 2?

Account Name

Debit

Credit

Income Tax Expense

Change in DTA

Change in DTL

Income Tax Payable

NOTES

Workpaper ReviewNotes

General:

Aldridge uses U.S. GAAP and has a tax rate of 30% in Year 1. During Year 2 the tax rate was increased to 35% for Year 2 and beyond.On the liability side, it had income tax payable of $35,500 in Year 1 and an estimated $28,900 in Year 2.

Year 1:

MarLife Co. life insurance policy on Chief Operating Officer where Aldridge is sole beneficiary paid out $200,000 to Aldridge. Advance royalties received of $50,000 for anticipated sales during Year 2.

Different depreciation methods usedfinancial statement depreciation is straight-line, $35,000, and tax depreciation is accelerated, $52,000. Records show a $1,000 fine paid to the IRS for failure to provide required paperwork. Bad debt expense booked on receivables of $25,000.

Next Steps:

Evaluate differences to determine whether DTA or DTL is appropriate; prepare Year 1 and 2 related journal entries for comparison to Aldridge general ledger.

K. Wesley, 1/29/Year 3