Exercise NO: 8

Button Company has the following two temporary differences between its income tax expense and income taxes payable.\n2014 2015 2016\nPretax fi nancial i

Button Company has the following two temporary differences between its income tax expense and income taxes payable.

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2014 2015 2016

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Pretax fi nancial income $840,000 $910,000 $945,000

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Excess depreciation expense on tax return (30,000) (40,000) (10,000)

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Excess warranty expense in fi nancial income 20,000 10,000 8,000

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Taxable income $830,000 $880,000 $943,000

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The income tax rate for all years is 40%.

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Instructions

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(a) Assuming there were no temporary differences prior to 2014, prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2014, 2015, and 2016.

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(b) Indicate how deferred taxes will be reported on the 2016 balance sheet. Button’s product warranty is for 12 months.

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(c) Prepare the income tax expense section of the income statement for 2016, beginning with the line “Pretax financial income.”

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