Question 2 (Netting of deferred tax assets and liabilities): Static Corporation computed a pretax financial income of $90,000 for the first year of its operations ended December 31, 20X1. Included in financial income was $50,000 of nontaxable revenue, $40,000 gross profit on installment sales that was deferred for tax purposes until the installments were collected, and $100,000 in warranties payable that had been recognized as expense on the books in 20X1 when product sales were made. The temporary differences are expected to reverse in the following pattern:

Required:

1. Prepare journal entries to record income taxes payable and deferred income taxes for the year ended December 31, 20X1. Assume there will be sufficient income in each future year to realize any deductible amount.

2. Prepare the income statement for Static beginning with Income from continuing operations before income taxes for the year ended December 31, 20X1.

Year Gross Profit on collections 20X2 20X3 Warranty payments $18,000 33,000 41,000 8,000 $100,000 $10,000 14,000 4,000 12,000 $40,000 20X4 20X5 The enacted tax rates for this year and the next four years are as follows: 20X1 40% 20X4 - 30% 20X2 - 36% 20X5 30% 20X3 - 33%