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Max Co. shows income before tax amounting to $580,000 on its income statement (prepared under GAAP) for the year ending December 31, 2018.

Max Co. shows income before tax amounting to $580,000 on its income statement (prepared under GAAP) for the year ending December 31, 2018. You are assigned to prepare the income tax expense/provision journal entry. You learn the following additional information:

  • Max recognized $10,000 of fines that are not tax deductible. (Just to be clear, the fines are including in calculating $580,000 income before tax.)
  • Max's depreciation expense under GAAP was $80,000 (already reflected in the $580,000). Depreciation on the tax return will total $120,000.
  • Max sold $50,000 of magazine subscriptions at the end of the year. Those subscriptions will not be fulfilled (magazines delivered to subscribers) until next year.
  • Max earned (and recorded) $15,000 of tax-exempt municipal bonds during the year.
  • Max's tax rate is 21% (only federal, Max is not subject to any other income taxes).
  1. Your assignment is to calculate Max's income tax expense for the year, income taxes payable, deferred tax assets and liabilities (separating current and noncurrent assets and liabilities).  prepare a journal entry, or write out the answers, so long as I can determine the amounts for each of those items (if any) and how you calculated them.
  2. What is Max's effective tax rate? (As it will be disclosed in Max's annual report.) Be sure to show how you calculated the effective tax rate.

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