(One Temporary Difference, Tracked for 4 Years, One Permanent Difference, Change in Rate) The pretax financial income of Truttman Company differs from its taxable income throughout each of 4 years as follows. Year Pretax Financial Income Taxable Income Tax Rate 2020 $290,000 $180,000 35% 2021 320,000 225,000 20 2022 350,000 260,000 20 2023 420,000 560,000 20 Pretax financial income for each year includes a nondeductible expense of $30,000 (never deductible for tax purposes). The remainder of the difference between pretax financial income and taxable income in each period is due to one depreciation temporary difference. No deferred income taxes existed at the beginning of 2020. Instructions a. Prepare journal entries to record income taxes in all 4 years. Assume that the change in the tax rate to 20% was not enacted until the beginning of 2021. b. Prepare the income statement for 2021, beginning with Income before income taxes.

Truttman Company

a. Journal Entries:

December 31, 2020:

Debit Income Tax Expense $112,000

Income Tax Payable $63,000

Deferred tax liability $49,000

To record income tax expense for the year.

December 31, 2021:

Debit Income Tax Expense $70,000

Income Tax Payable $112,000

Deferred tax liability $25,000

To record income tax expense for the year.

December 31, 2022:

Debit Income Tax Expense $76,000

Income Tax Payable $52,000

Deferred tax liability $24,000

To record income tax expense for the year.

December 31, 2023:

Debit Income Tax Expense $90,000

Deferred tax asset $22,000

Income Tax Payable $112,000

To record income tax expense for the year.

b. Income Statement for 2021

Year                                               2021    

Pretax Financial Income    $320,000

Income tax expense               70,000

Net income                        $250,000

Explanation:

a) Data and Calculations:

Year   Pretax Financial Income   Taxable Income    Tax Rate

2020          $290,000                     $180,000                35%

2021             320,000                      225,000                 20

2022            350,000                      260,000                 20

2023            420,000                      560,000                 20

Year                                         2020            2021          2022            2023

Pretax Financial Income    $290,000    $320,000   $350,000    $420,000

add Nondeductible expense 30,000        30,000        30,000         30,000

Adjusted Pretax Financial $320,000    $350,000   $380,000    $450,000

Taxable Income                    180,000       225,000     260,000      560,000

Depreciation temporary

 differences                       $140,000     $125,000    $120,000    ($110,000)

Tax Rate                                     35%               20%            20%             20%

Income Tax Payable           $63,000      $45,000     $52,000     $112,000

Deferred tax liability (asset) 49,000        25,000        24,000      (22,000)

Income tax expense         $112,000      $70,000      $76,000     $90,000

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