The following information was disclosed during the audit of Elbert Inc.

1.

                                        Amount Due
Year                           per Tax Return
2020......................................$130,000
2021........................................104,000

2. On January 1, 2020, equipment costing $600,000 is purchased. For financial reporting purposes, the company uses straight-line depreciation over a 5-year life. For tax purposes, the company uses the elective straight-line method over a 5-year life. (Hint: For tax purposes, the half-year convention as discussed in Appendix 11A must be used.)

3. In January 2021, $225,000 is collected in advance rental of a building for a 3-year period. The entire $225,000 is reported as taxable income in 2021, but $150,000 of the $225,000 is reported as unearned revenue in 2021 for financial reporting purposes. The remaining amount of unearned revenue is to be recognized equally in 2022 and 2023.

4. The tax rate is 20% in 2020 and all subsequent periods.

5. No temporary differences existed at the end of 2019. Elbert expects to report taxable income in each of the next 5 years.

Instructions

a. Determine the amount to report for deferred income taxes at the end of 2020, and indicate how it should be classified on the balance sheet.

b. Prepare the journal entry to record income taxes for 2020.

c. Draft the income tax section of the income statement for 2020, beginning with “Income before income taxes.” (Hint: You must compute taxable income and then combine that with changes in cumulative temporary differences to arrive at pretax financial income.)

d. Determine the deferred income taxes at the end of 2021, and indicate how they should be classified on the balance sheet.

e. Prepare the journal entry to record income taxes for 2021.

f. Draft the income tax section of the income statement for 2021, beginning with “Income before income taxes.”