Stratco Corporation computed a pretax financial income of $40,000 for the first year of its operations ended December 31, 2011. Included in financial income was $50,000 of nontaxable revenue, $20,000 gross profit on installment sales that was deferred for tax purposes until the installments were collected, and $50,000 in warranties payable that had been recognized as expense on the books in 2011 when product sales were made.

The temporary differences are expected to reverse in the following pattern:

The enacted tax rates for this year and the next four years are as follows:
2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40%
2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Instructions:
1. Prepare journal entries to record income taxes payable and deferred income taxes. Assume that there will be sufficient income in each future year to realize any deductible amount.
2. Prepare the income statement for Stratco beginning with Income from continuing operations before income taxes for the year ended December 31,2011.

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Year Gross Profit on Collections Warranty Payments $5.000 7,000 2,000 6,000 9.000 16.500 20,500 4.000 2014 2015 Totals $20,000 $50,000