two differences one rate first year the differences between 251504

(Two Differences, One Rate, First Year) The differences between the book basis and tax basis of the assets and liabilities of Morgan Corporation at the end of 2010 are presented below.

Book Basis Tax Basis

Accounts receivable $50,000 $–0–

Litigation liability 20,000 –0–

It is estimated that the litigation liability will be settled in 2011. The difference in accounts receivable will result in taxable amounts of $30,000 in 2011 and $20,000 in 2012. The company has taxable income of $300,000 in 2010 and is expected to have taxable income in each of the following 2 years. Its enacted tax rate is 34% for all years. This is the company’s first year of operations. The operating cycle of the business is 2 years.

(a) Prepare the journal entry to record income tax expense, deferred income taxes, and income tax payable for 2010.

(b) Indicate how deferred income taxes will be reported on the balance sheet at the end of 2010.

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