Question 2

The following information is available for the first four years of operations for Acme Company:

i.YearTaxable IncomeTax Rate

2018$380,00021%

2019300,00021%

2020415,00019%

2021432,00019%

ii.On January 1, 2018, heavy equipment costing $1,000,000 was purchased. The equipment had a life of 4 years and no salvage value. The straight-line method of depreciation is used for book[1] purposes and the tax depreciation taken each year is listed below:

Tax Depreciation

2018 2019 2020 2021 Total

$330,000$450,000$150,000$70,000$1,000,000

iii.On January 1, 2018, $450,000 was collected in advance for rental of a building for a three-year period. The entire $450,000 was reported as taxable income in 2018, but $300,000 of the $450,000 was reported as unearned revenue at December 31, 2018 for book purposes.

iv.In 2018, the company recognized $30,000 in fine for pollution as an expense on the income statement.

v.In 2019, the company received $15,000 Interest on municipal bonds.

Instructions

(a)Calculate pretax financial income for 2018 and 2019. (4 points)

(b) Prepare the journal entry to record income tax expense, deferred income taxes, and income tax payable for 2018. (3 points)

(c)Prepare the journal entry to record income tax expense, deferred income taxes, and income tax payable for 2019. (3 points)

(d) Prepare the journal entry to record income tax expense, deferred income taxes, and income tax payable for 2020. (3 points)

[1] Please note: book purposes is same as financial reporting purposes