1. Rehobeth Company's taxable income and other financial data for 2016 are presented below:

Taxable income $500,000 Interest received on municipal bonds 75,000 Estimated bad debt expense (not written off) 40,000 Cash expenditures for product warranty expenses 108,000 Product warranty expense for accounting purposes 142,000 Gross profit on installment sales for 2016 180,000 Gross profit recognized in 2016 for tax purposes based on installment

sales in 2016 160,000

Required:

a. Calculate Rehobeth Company's 2016 pretax financial income.

b. For each item, explain why there is a difference, if any exists, between how it is treated for taxable income purposes and pretax financial income.