Reference no: EM132405146

Question

In its 1st year of operations, ABC Company reported the following info:

Income before income taxes was $620,000

The company acquired capital assets costing $1,800,000; depreciation was $120,000 and CCA was $90,000

The company recorded an expense of $125,000 for the one-year warranty on their products; cash disbursements amounted to $77,000

The company incurred development costs of $75,000 that met the criteria for capitalization for accounting purposes. Development work was still ongoing at year-end. These costs could be immediately deducted for tax purposes

The company made a political contribution of $20,000 and expensed this for accounting purposes

The income tax rate was 28% and the year 2 tax rate was enacted, at 30%

In the 2nd year of operations, their reported the following:

Earnings before income tax were $1,600,000

Depreciation was $120,000, and CCA was $260,000

The estimated warranty costs were $200,000, while the cash expenditure was $205,000

Additional development costs of $150,000 were incurred to complete the project. For accounting purposes, amortization of $38,000 was recorded

Golf club memberships for top executives at the company cost $25,000; this was expensed for accounting purposes as a marketing expense

Prepare the journal entries to record income tax expense for the 1st and 2nd years of operation, and explain the tax rate used to determine the deferred income tax in the 1st year.