The following additional information about Hanks Company, Inc. is available: 1. Hanks was founded in 1990 and its fiscal and tax years end December 31. 2. Hanks' taxable income for the last three years along with the tax rates for those years is as follows. Assume that Hanks carries forward net operating losses (NOLs): ) 3. The enacted tax rate for 2006 is 35% but is 30% for 2007 and all years thereafter. This annual schedule of enacted rates has existed for several years. 4. The only equipment owned by Hanks, Inc. was purchased on January 1, 2003 for $225,000. The equipment has an economic life for book and tax purposes of five years and it is expected to have no salvage value at the end of its life. The equipment is depreciated on a straight-line basis for the financial statements. Assume the following percentages are depreciated each year under the tax code (MACRS): 2003-33.33\%, 2004-26.67\%, 2005-20\%, 200613.33%,20076.67% (round depreciation to nearest thousand). No equipment was purchased or retired during 2006. 5. Assume that Hanks carries forward net operating losses (NOLs) to reduce the taxes it owes on taxable income for the year. In 2005, Hanks expected to have taxable income of $50,000 in 2006 and taxable income of $100,000 in 2007 . In 2006 , Hanks still expects to have taxable income of $100,000 in 2007. 6. Prepaid rent and prepaid insurance are current assets while subscriptions received in advance and wages payable are current liabilities. Assume that amounts paid (in cash) for prepaid rent, prepaid insurance, and wages payable are deductible in the current year for tax purposes. Also assume that subscriptions received in advance (in cash) are taxable in the current year for tax purposes. 7. The 12/31/2005 balances in the deferred tax asset and liability accounts are correctly calculated. Required A. Determine taxable income (before any NOL carryforwards) and the amount of taxes owed (after any NOL carryforwards) for Hanks' 2006 tax year. B. Prepare a schedule that determines the amount of deferred tax assets and the amount of deferred tax liabilities as of the end of 2006. C. Calculate the amount of tax expense that Hanks Company, Inc. should show on its income statement for 2006. D. Prepare the journal entry to properly record the tax expense for 2006 . E. (Extra Credit) Pretax financial income is shown as $36,500. The tax rate for 2006 is 35%. Why isn't tax expense equal to 35% x 36,500 ? Explain. Deferred Tax Worksheet