At the end of 2007, its first year of operations, the Beattie Company reported taxable income of $38,000 and pretax financial income of $34,400. The difference is due to the way the company handles its warranty costs. For tax purposes, the company deducts the warranty costs as they are paid. For financial reporting purposes, the company provides for a year-end estimated warranty liability based on future expected costs. The company is subject to a 30% tax rate for 2007 and no change in the tax rate has been enacted for future years. Based on verifiable evidence, the company decides it should establish a valuation allowance of 60% of its ending deferred tax asset.
Required
1. Prepare the income tax journal entry of the Beattie Company at the end of 2007.
2. Prepare the lower portion of the Beattie Company’s 2007 income statement.