Exercise NO: 4

Zurich Company reports pretax financial income of $70,000 for 2014. The following items cause taxable income to be different than pretax financial inc

Zurich Company reports pretax financial income of $70,000 for 2014. The following items cause taxable income to be different than pretax financial income.

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1. Depreciation on the tax return is greater than depreciation on the income statement by $16,000.

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2. Rent collected on the tax return is greater than rent recognized on the income statement by $22,000.

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3. Fines for pollution appear as an expense of $11,000 on the income statement.

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Zurich’s tax rate is 30% for all years, and the company expects to report taxable income in all future years. There are no deferred taxes at the beginning of 2014.

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Instructions

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(a) Compute taxable income and income taxes payable for 2014.

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(b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2014.

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(c) Prepare the income tax expense section of the income statement for 2014, beginning with the line “Income before income taxes.”

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(d) Compute the effective income tax rate for 2014.

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