Wilcox Company has prepared the following reconciliation of its pretax financial income with its taxable income for 2007:
Pretax financial income ............................$3,000
Add: Estimated expense on one-year warranties recognized for financial reporting in excess of actual warranty costs deducted for income taxes ..................100
Less: MACRS depreciation deducted for income taxes in excess of depreciation recognized for financial reporting .............................(150)
Taxable income ..............................$2,950
At the beginning of 2007, Wilcox Company had a deferred tax liability of $495. The current tax rate is 30% and no change in the tax rate has been enacted for future years. At the end of 2007, the company anticipates that actual warranty costs will exceed estimated warranty expense by $100 next year and that financial depreciation will exceed tax depreciation by $1,800 in future years. The company has earned income in all past years and expects to earn income in the future.
Required
1. Prepare the income tax journal entry of the Wilcox Company at the end of 2007.
2. Prepare the lower portion of Wilcox’s 2007 income statement.
3. Show how the income tax items are reported on Wilcox’s December 31, 2007 balance sheet.