As the new accountant for Carly’s Pet Express Inc., a line of pet boutiques, you are developing the financial statement disclosures for the 2011 financial statement note on Income Taxes. The company uses PE GAAP, and has selected the taxes payable method. The statutory tax rate is currently 38%. During 2011, net income before taxes was $185,000. CCA exceeded depreciation expense by $25,000. The only permanent difference was the non-deductible portion of meals and entertainment costs, 50% of $20,000.
(a) Determine the income tax expense to be recorded using the taxes payable method and record the necessary journal entry.
(b) Prepare the reconciliation of actual tax rate to the statutory rate as required for inclusion in the financial statement note on Income Taxes.