The following information is available for the first two years of operations for Kareem, Inc.:

Year Earnings before Tax

2022 $1,350,000

1. 1,150,000

a. Depreciation of property, plant and equipment for financial reporting purposes amounts to $90,000 each year for 2022-2024. The company deducts the full cost under the IRS Code Section 179 $270,000 amount allowed for tax purposes in 2022.

b. On August 1, 2022, the company rented property and received $120,000 which covers 12 months rent. The portion of rent revenue is properly recorded on the books and the full amount is appropriately recognized in taxable income for the year ending December 31, 2022.

c. In 2023 Kareem, Inc. incurred a lawsuit which is probable and estimated at $75,000. It has been properly recorded as a litigation liability at 12/31/23 and was paid November 1, 2023.

d. The company sells its merchandise on an installment contract basis. In 2022, Kareem, Inc. reported gross profit of $420,000 tax purposes, and $480,000 for financial statement purposes. This will result in a taxable amount of $60,000 in 2023.

e. Kareem, Inc. insures the lives of its chief executives. The premiums paid amount each year from 2022- 2024 is $26,000 and this amount was shown as an expense on the income statement.

f. Kareem, Inc. earns interest on Massachusetts tax-exempt state bonds in the amounts of $27,000 each year in 2022, 2023 and 2024.

The enacted tax rates existing for December 31, 2022 are 24% and 30% for 2023 and thereafter.

Instructions

1. Complete the worksheet provided. It includes the following.
   1. Prepare a reconciliation of Book Income to Taxable Income for 2022.
   2. Prepare a schedule of future taxable and (deductible) amounts at the end of 2022.
   3. Prepare a schedule of the deferred tax (asset) and liability at the end of 2022.
   4. Prepare the journal entry to record income tax expense, deferred income taxes, and income tax payable for 2022.
2. Show how the deferred income taxes should be reported on the Balance Sheet at December 31, 2022.
3. Show how the taxes should be reported on the Income Statement at December 31, 2022.

Repeat a. to g. above for 2023.

Deferred Tax Worksheet 2022