Accounting, Analysis, and Principles Allman Company, which began operations at the beginning of 2010, produces various products on a contract basis. Each contract generates a gross profit of $80,000. Some of Allman’s contracts provide for the customer to pay on an installment basis. Under these contracts, Allman collects one-fifth of the contract revenue in each of the following four years. For financial reporting purposes, the company recognizes gross profit in the year of completion (accrual basis); for tax purposes, Allman recognizes gross profit in the year cash is collected (installment basis).

Presented below is information related to Allman’s operations for 2012:

1. In 2012, the company completed seven contracts that allow for the customer to pay on an installment basis. Allman recognized the related gross profit of $560,000 for financial reporting purposes. It reported only $112,000 of gross profit on installment sales on the 2012 tax return. The company expects future collections on the related installment receivables to result in taxable amounts of $112,000 in each of the next four years.

2. In 2012, nontaxable municipal bond interest revenue was $28,000.

3. During 2012, nondeductible fines and penalties of $26,000 were paid.

4. Pretax financial income for 2012 amounts to $500,000.

5. Tax rates (enacted before the end of 2012) are 50% for 2012 and 40% for 2013 and later.

6. The accounting period is the calendar year.

7. The company is expected to have taxable income in all future years.

8. The company has no deferred tax assets or liabilities at the end of 2011.

Accounting

Prepare the journal entry to record income taxes for 2012.

Analysis

Classify deferred income taxes on the balance sheet at December 31, 2012, and indicate, starting with income before income taxes, how income taxes are reported on the income statement. What is Allman’s effective tax rate?

Principles

Explain how the conceptual framework is used as a basis for determining the proper accounting for deferred income taxes.