The following information was disclosed during the audit of Martinez Inc. 1. Year Amount Due per Tax Return $134,300 101,500 2017 2018 2. On January 1, 2017, equipment costing $599,900 is purchased. For financial reporting purposes, the company uses straight-line depreciation over a 5-year life. For tax purposes, the company uses the elective straight-line method over a 5-year life. (Hint: For tax purposes, the half-year convention as discussed in Appendix 11A must be used.) 3. In January 2018, $231,300 is collected in advance rental of a building for a 3-year period. The entire $231,300 is reported as taxable income in 2018, but $154,200 of the $231,300 is reported as unearned revenue in 2018 for financial reporting purposes. The remaining amount of unearned revenue is to be recognized equally in 2019 and 2020. 4. The tax rate is 40% in 2017 and all subsequent periods. (Hint: To find taxable income in 2017 and 2018, the related income taxes payable amounts will have to be "grossed up.") 5. No temporary differences existed at the end of 2016. Martinez expects to report taxable income in each of the next 5 years. Determine the amount to report for deferred income taxes at the end of 2017, and indicate how it should be classified on the balance sheet. The amount to report for deferred income taxes Martinez Inc. Balance Sheet SHOW LIST OF ACCOUNTS Prepare the journal entry to record income taxes for 2017. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter o for the amounts.) Account Titles and Explanation Debit Credit Income Tax Expense Deferred Tax Asset Income Tax Payable SHOW LIST OF ACCOUNTS Draft the income tax section of the income statement for 2017, beginning with "Income before income taxes." (Hint: You must compute taxable income and then combine that with changes in cumulative temporary differences to arrive at pretax financial income.) (Enter loss using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Martinez Inc. Income Statement (Partial) SHOW LIST OF ACCOUNTS Determine the deferred income taxes at the end of 2018, and indicate how they should be classified on the balance sheet. The deferred income taxes Martinez Inc. Balance Sheet SHOW LIST OF ACCOUNTS Prepare the journal entry to record income taxes for 2018. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter o for the amounts.) Account Titles and Explanation Debit Credit SHOW LIST OF ACCOUNTS Draft the income tax section of the income statement for 2018, beginning with "Income before income taxes." (Enter loss using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Martinez Inc. Income Statement (Partial) Click if you would like to Show Work for this question: Open Show Work ILLUSTRATION 11A-1 MACRS Property Classes Tax Depreciation Methods Companies compute depreciation expense using the tax basis-usually the cost of the asset. The depreciation method depends on the MACRS property class, as shown below. MACRS Property Class Depreciation Method 3-, 5-, 7-, and 10-year property Double-declining-balance 15- and 20-year property 150% declining-balance 27.5- and 39-year property Straight-line The following information was disclosed during the audit of Martinez Inc. 1. Year Amount Due per Tax Return $134,300 101,500 2017 2018 2. On January 1, 2017, equipment costing $599,900 is purchased. For financial reporting purposes, the company uses straight-line depreciation over a 5-year life. For tax purposes, the company uses the elective straight-line method over a 5-year life. (Hint: For tax purposes, the half-year convention as discussed in Appendix 11A must be used.) 3. In January 2018, $231,300 is collected in advance rental of a building for a 3-year period. The entire $231,300 is reported as taxable income in 2018, but $154,200 of the $231,300 is reported as unearned revenue in 2018 for financial reporting purposes. The remaining amount of unearned revenue is to be recognized equally in 2019 and 2020. 4. The tax rate is 40% in 2017 and all subsequent periods. (Hint: To find taxable income in 2017 and 2018, the related income taxes payable amounts will have to be "grossed up.") 5. No temporary differences existed at the end of 2016. Martinez expects to report taxable income in each of the next 5 years. Determine the amount to report for deferred income taxes at the end of 2017, and indicate how it should be classified on the balance sheet. The amount to report for deferred income taxes Martinez Inc. Balance Sheet SHOW LIST OF ACCOUNTS Prepare the journal entry to record income taxes for 2017. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter o for the amounts.) Account Titles and Explanation Debit Credit Income Tax Expense Deferred Tax Asset Income Tax Payable SHOW LIST OF ACCOUNTS Draft the income tax section of the income statement for 2017, beginning with "Income before income taxes." (Hint: You must compute taxable income and then combine that with changes in cumulative temporary differences to arrive at pretax financial income.) (Enter loss using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Martinez Inc. Income Statement (Partial) SHOW LIST OF ACCOUNTS Determine the deferred income taxes at the end of 2018, and indicate how they should be classified on the balance sheet. The deferred income taxes Martinez Inc. Balance Sheet SHOW LIST OF ACCOUNTS Prepare the journal entry to record income taxes for 2018. (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter o for the amounts.) Account Titles and Explanation Debit Credit SHOW LIST OF ACCOUNTS Draft the income tax section of the income statement for 2018, beginning with "Income before income taxes." (Enter loss using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).) Martinez Inc. Income Statement (Partial) Click if you would like to Show Work for this question: Open Show Work ILLUSTRATION 11A-1 MACRS Property Classes Tax Depreciation Methods Companies compute depreciation expense using the tax basis-usually the cost of the asset. The depreciation method depends on the MACRS property class, as shown below. MACRS Property Class Depreciation Method 3-, 5-, 7-, and 10-year property Double-declining-balance 15- and 20-year property 150% declining-balance 27.5- and 39-year property Straight-line