Reference no: EM132939812

Question - On January 1st of Year 1, AirTravel Corporation sold subscriptions to its online reservation service for $40,000 in cash. The subscriptions are for a four-year period and the first year's subscriptions are fully earned at the end of Year 1. The enacted tax rate for each year is 40%. This revenue is recognized on a cash basis for tax purposes. In addition to the subscriptions sold, assume that AirTravel reported other revenues net of expenses of $100,000 each year for both GAAP and tax purposes. The amount of future income is estimated at $100,000 per year at the beginning of Year 1.

Required - Show all computations to receive full credit

a. Show the journal entries required to record the tax provision for December 31st of Years 1 through 4.

b. Determine the balance in the deferred tax account on December 31st of Year 3.

c. Independent of your responses to Parts a and b, assume that a new tax law is enacted effective at the beginning of Year 3 lowering the tax rate to 35%. Prepare the journal entry necessary to record the tax provision at December 31st of Years 3 and 4.

d. Show the footnote reconciliation of the Federal Statutory Income Tax Rate with the Effective or Actual Tax rate for Year 3 assuming the tax rate change in Part c.