PROBLEM 1 – Accounting for Income Taxes (25 points)
The following differences enter into the reconciliation of financial income and taxable income of
Starfish Company for the year ended December 31, 2008, its first year of operations.
enacted income tax rate is 30% for 2008 and 2009 and 34% for 2010 and beyond.
Pretax accounting income
Excess tax depreciation on tax return
Litigation accrual (expense on 2008 income statement)
Unearned rent revenue deferred on the books but recognized in taxable income
Interest income from New York municipal bonds
The excess tax depreciation will reverse over a four-year period as follows: $50,000
in 2009, $75,000 in 2010, $75,000 in 2011, and $100,000 in 2012.
It is estimated that the litigation liability will be paid in 2009, at which time it will be tax
Starfish collected the first and last years’ rent from a new tenant during 2008.
years’ rent were reported as taxable revenue on the 2008 tax return.
The last year’s
rent is appropriately reported as unearned rent revenue on the balance sheet.
corresponding rent revenue will be recognized on the income statement during the
last year of the lease, 2012.
The interest revenue from the New York bonds is not taxable.
Prepare the December 31, 2008, journal entry to record income tax expense, income
taxes payable, and deferred taxes for Starfish.
Calculate net income for Starfish for the year ended December 31, 2008.
Calculate the effective tax rate for Starfish for the year ended December 31, 2008.
Additional space is available on the next page, if necessary.
Exam #2 / Spring 2007 / Page 2 of 7