Part 1

The Smith Company has been in existence for several years.After a period of growth and equipment acquisitions, the company's operations have stabilized.Smith uses the percentage-of-completion method for revenue recognition for book purposes and the completed contract method for income tax purposes.The company also uses MACRS for income tax purposes and straight-line depreciation for book purposes.The company's pre-tax accounting income is $125,000.The company's income tax rate is 30%.You have identified the following differences in the reporting of items for book and income tax purposes:

1

Excess of straight-line depreciation over MACRS depreciation.

25,000

2

Expenditures capitalized for book purposes but expensed for tax purposes.

1,000

3

Fine paid for late payment of employee tax withholdings.

2,000

4

Interest earned and collected on City of Muncie sewer bonds.

1,500

5

Revenue recognized under percentage of completion method

15,000

6

Rent collected in advance from tenant

4,500

7

Life insurance premiums paid on key executives

3,000

Required:Using Excel, prepare a schedule to compute Smith's taxable income and income tax liability for the current year.

Part 2

Nott Co. at the end of 2020, its second year of operations.The company uses accelerated depreciation methods for income tax purposes and the straight-line method for financial reporting purposes.At the end of 2020, the remaining depreciation book/tax differences will result in $1,000,000 in taxable amounts over the next five years.In 2020, the company reporting for financial reporting purposes $860,000 of estimated expenses that will be tax deductible when paid in 2021.At the end of 2019, the company reported a deferred income tax liability of $200,000 and a deferred income tax asset of $130,000 related to the timing differences between reporting for book and tax purposes.The current enacted tax rate is 45% and no changes are expected in the future.

Required:Using Excel, prepare the journal entry to record Nott Co.'s income tax expense, deferred taxes, and income taxes payable for 2020.

SUBMIT YOUR WORK AS AN EXCEL FILE