Paula Coal Company purchased equipment for $270,000 on January 2, 2021, its first day of operations. For book purposes, the equipment will be depreciated using the straight-line method over three years with no salvage value. Pretax financial income and taxable income are as follows:

20212022 2023

Pretax financialincome$156,000$170,000$180,000

Taxableincome 120,000170,000216,000

The temporary difference between pretax financial income and taxable income is due to the use of accelerated depreciation for tax purposes.

Required for Part A:

Prepare the journal entries to record income taxes for all three years (expense, deferrals, and liabilities) assuming that the enacted tax rate as of 2021 is 30% and on January 1, 2022, Congress raises the income tax rate to 35%.

Independent of your answer to Part A, Paula Coal Companypresents the following information for 2022 and 2023.

2022

• Sales on account in the amount of $645,000
• Warranty expense and associated liability in the amount of $125,000
• Assume that these are the only revenue and expenses reported by the company.

2023

• Sales on account in the amount of $225,000
• Actual warranty repairs made in the amount of $65,000
• Assume that these are the only revenue and expenses reported by the company.

Required for Part B:

1. Prepare the journal entries for 2022 and 2023 to record the income tax effects of the above transactions. Assume a 40% tax rate and that it is more likely than not that future income will be sufficient to realize all future tax benefits.

2. For 2022 only assume a 40% tax rate and that it is more likely than not that only $25,000 of future income is expected to be realized. Prepare the journal entry to record the tax provision for 2022.