Part I:

Axle Manufacturing Inc (Axle) is in the business of manufacturing auto parts. On December 31, 2016, the carrying value of its equipment was $1,050,000, its UCC for equipment was $990,000, and its warranty liability had a balance of $650,000 and prepaid insurance of $150,000. Axles accounting income for the year ended December 31, 2017 was $985,000. Items included in accounting income for 2017 were:

Taxable dividends: $100,000 Meals & entertainment: $21,000 Interest & penalties on filing of late tax returns: $20,000 Depreciation expense on equipment: $300,000 Warranty expense: $250,000 Insurance expense: $75,000 (Note 1) Note 1: On January 1, 2016, Axle paid $225,000 for 3 year insurance coverage, and deducted the entire amount for tax purpose.

For 2017, Axle claimed a CCA of $198,000. Cash warranty expenses for 2017 totaled $200,000.

Axle follows ASPE. Its tax rate was 30% for 2017.

Required: Write neatly and show all your work.

A) Prepare the journal entries to record future income tax expense/benefit for each difference separately for 2017.

Part II:

Brenton Inc (Brenton) reported following pre-tax income (loss):

2015: $ 750,000 2016: (1,675,000) 2017: 2,000,000

Brentons accounting income (loss) and taxable income (loss) were the same for all three years. Assume tax rate of 30% for all three years.

Required: Write neatly and show all your work.

Prepare journal entries for 2016, and 2017 to record income tax expense and the effects of loss carry overs, assuming Brenton uses carry back provisions first. All income and losses relate to normal operations, and it is more likely than not that the company will generate enough income in the future to utilize 90% losses.