The following information is available for the first three years of operations for

Strawberry

Company:

1.

Year

Taxable Income

2020

$500,000

2021

375,000

2022

400,000

2.

On January 2, 2020, heavy equipment costing $800,000 was purchased. The equipment had a life of 5 years and no salvage value. The straight-line method of depreciation is used for book purposes and the tax depreciation taken each year is

listed below:

Tax Depreciation

2020

2021

2022

2023

Total

$264,000

$360,000

$120,000

$56,000

Which total $800,000

3.

On January 2, 20

21

, $3

6

0,000 was collected in advance for rental of a building for a

three

-

year period. The entire $3

6

0,000 was reported as

taxable income in 20

21

, but

$2

4

0,000 of the $3

6

0,000 was reported as unearned revenue at December 31, 20

21

for book purposes.

No unearned revenue

was reported at December 31, 2022.

4.

Interest income

of $20,000

from New York

tax exempt

municipal bon

ds was

or will be

received

each year from 2020 through 202

5

.

5

.

The enacted tax rates are

2

0% for

2020 and 2021, and

25% for

all years

thereafter

.

As a result of the Cares Act

, additional

economic stimulus

bills, and

government

spending, s

om

e economists are speculating that it is probable that tax rates

beginning

in

2021 and

for the foreseeable future will

increase to 30

%.

Instructions

(SHOW YOUR WORK FOR FULL CREDIT)

a.

Prepare a schedule comparing depreciation for financial

reporting and tax

purposes.

(6 points)

b.

Prepare the journal entry or entries to record income tax expense, deferred income

taxes, and income tax payable for the years 2020, 2021, and 2022. Assume based

on the weight of the available evidence, it is

more likely than not that 10% of the

deferred tax asset will not be realized as of the end of each year.

(

12 points)

c.

Prepare a schedule of

the deferred tax (asset) or liability

to be reported on the

Balance Sheet

at

December 31,

20

20

.

Assume based on the weight of the

available evidence, it is more likely than not that 10% of the deferred tax asset will

not be realized as of the end of each year.

(

3

points)

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Problem 1 continued on next Page

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d.

Prepare

the income tax expense section

of the income statement for

20

20

,

beginning with the line "Income before income taxes

.

"

(6 points)

e.

Compute the effective tax rate for 2020.

(Round to

2 decimals, i.e., xx.xx%)

(3

points)

f.

Prepare a schedule of the deferred tax (asset)

or

liability

to be reported on the

Balance Sheet at December 31,

20

21

.

Assume based on the weight of the

available evidence, it is more likely than not that 10% of the deferred tax asset will

not be

realized as of the end of each year.