Part A. (5 marks) Listed in the table below are items that are treated differently for accounting purposes than they are for tax purposes. Indicate whether it is a Permanent or Reversible difference and it will create a deferred tax asset (DTA) or a deferred tax liability (DTL).

Item	Permanent or Reversible difference; DTA or DTL (if Reversing difference)
1. The excess amount of accrued pension expense over the amount paid.
2. The estimated gross profit on a long-term construction contract that is reported in the income statement, with some of the profit being deferred for tax purposes.

3. Penalty assessed by CRA for late submission of income tax return.

Part B. (13 marks). The records for Palm Tree Inc., a public corporation, show the following data for calendar 2020:

Machinery was acquired in January 2020 for $ 200,000. Kalman uses straight-line depreciation over a ten-year life (no residual value). For tax purposes, Kalman deducted CCA of $38,000 for 2020.

Dividends received from a Canadian corporation (nontaxable) were $ 14,500.

Premium paid for life insurance for key officers (non-deductible) was 1,000.

The estimated warranty liability related to 2020 sales was $ 22,400. Warranty repair costs paid during 2020 were $ 13,000. The remainder will be paid in 2021.

Pre-tax accounting income is $ 315,000. The enacted income tax rate is 25%.

Instructions

a) Prepare a schedule (starting with pre-tax accounting income) to calculate taxable income. (5 marks)

Pre-tax accounting income $315,000

Taxable income

b) Prepare the required adjusting journal entries to record income taxes (i.e. to record the current income tax expense, deferred income tax expense and deferred tax asset/liability) for 2020. Assume that the beginning balance in the deferred tax asset or liability is zero. (5 marks)