Reference no: EM132902545

Question - The following information relates to Fountain Designs Limited.

1. Pretax financial income for 2020 is $100,000.

2. The tax rate enacted for 2020 and future years is 40%.

3. Differences between the 2020 income statement and tax return are listed below:

a. Warranty expense accrued for financial reporting purposes amounts to $7,000. Warranty deductions per the tax return amount to $2,000.

b. Income on construction contracts using the percentage to completion method per books amounts to $92,000. Income on construction contracts for tax purposes amounts to $67,000.

c. Depreciation of property, plant and equipment for financial reporting purposes amounts to $60,000. Depreciation of these assets amounts to $80,000 for the tax return.

d. A $3,500 fine paid for violation of pollution laws was deducted in computing pretax financial income.

e. Interest revenue recognized on an investment in tax-exempt bonds amounts to $1,500.

4. Taxable income is expected for the next few years.

Required -

a. Compute taxable income for 2020.

b. Compute the deferred taxes at December 31, 2020, that relate to the temporary differences described above. Clearly label them as deferred tax asset or liability.

c. Prepare the journal entry to record income tax expense, deferred taxes and income taxes payable for 2020.

d. Draft the income tax expense section of the Income Statement beginning with Income before Income Taxes.