At the End of Its First Year of Operations on December

question 27

Essay

At the end of its first year of operations on December 31, 2016, the Mojave Company reported pretax financial income of $100,000. An investigation of that income revealed the following items:
· Bad debts expense of $12,000 was recognized. The accounts will be written off in 2017.
· Installment sales of $50,000 were recognized in financial income. These sales were accounted for by the installment sales method for income tax purposes. Only $20,000 was reported on the tax return.
· Warranty expenses of $16,000 were accrued for financial reporting purposes, but were not expected to result in a cash payment until 2017.
· Depreciation on the tax return exceeded depreciation for financial reporting purposes by $32,000.
Assume that any deferred tax assets are considered more likely than not to be realized. The enacted income tax rate for all years is 25%.
Required:
a. Compute taxable income.
b. Prepare the entry to record income tax expense and any related assets and liabilities for
Mojave on December 31, 2016.

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Definitions:

Accounts Receivable

Amounts owed to a business by its customers for goods or services delivered but not yet paid for.

Journalize

The act of recording transactions in the journal as part of the accounting process.

Office Equipment

Tangible property like desks, computers, and machinery used in an office for operations.

Fair Market Value

The price at which an asset would change hands between a willing buyer and seller, both having reasonable knowledge of the relevant facts and neither being under any compulsion to buy or sell.