Chen Corporation reported income before taxes for the year ended December 31, 2011, of $1,645,000. In preparing the 2011 financial statements, the accountant discovered an error that was made in 2010. The error was that a piece of land with a cost of $40,000 had been recognized as an operating expense in error. The balance reported as retained earnings at December 31, 2010, was $5,678,000, and the net book value of property, plant, and equipment (excluding land) was $1,352,000 at the same date. During 2011, Chen Corporation acquired additional equipment with a cost of $16,000.
In completing the corporate tax return for the 2011 year, the company controller noted that the 2011 depreciation expense was $365,000, CCA claimed was $300,000, and non-deductible income tax penalties and interest of $2,500 and golf club dues of $4,500 were incurred in the year. In addition, the accounting allowance for doubtful accounts exceeded the tax reserve for uncollectible amounts by $20,000, although they were equal at the beginning of the year. At the end of 2010, the company had temporary differences of $135,000, due to lower depreciation expense than CCA claimed on the corporate tax return. The resulting future taxable amounts and the dates they were expected to reverse at December 31, 2010, were:
2011 .........$ 65,000
2012 ......... 40,000
2013 ......... 30,000
The tax rate is 35% for all years. Chen Corporation applies PE GAAP and uses the future income taxes method of accounting.
(a) Calculate the balance sheet future tax account balance at December 31, 2010.
(b) Determine the effect of the prior period error on the December 31, 2010 balance sheet and prepare the journal entry to correct the error. Assume that the 2010 income tax return is refiled.
(c) Prepare the journal entries to record income taxes for the 2011 year.
(d) Indicate how the income taxes will be reported on the financial statements for 2011 by preparing the bottom portion of the income statement beginning with “Income before income taxes.” Also prepare the Statement of Retained Earnings for the year ended December 31, 2011, assuming no dividends were declared during the year.