P18.8 (LO 1, 2, 4) (Two Differences, 2 Years, Compute Taxable Income and Pretax Financial Income) The following information was disclosed during the audit of Zheng Group.

1.

Year Amount Due per Tax Return 2025 ¥130,000,000 2026 104,000,000 2. On January 1, 2025, equipment costing ¥600,000,000 is purchased. For financial reporting purposes, the company uses straight-line depreciation over a 5-year life. For tax purposes, the company uses the double-declining balance method over 5 years.

3. In January 2026, ¥225,000,000 is collected in advance rental of a building for a 3-year period. The entire ¥225,000,000 is reported as taxable income in 2026, but ¥150,000,000 of the ¥225,000,000 is reported as unearned revenue in 2026 for financial reporting purposes. The remaining amount of unearned revenue is to be recognized equally in 2027 and 2028.

4. The tax rate is 40% in 2025 and all subsequent periods. (Hint: To find taxable income in 2025 and 2026, the related income taxes payable amounts will have to be “grossed up.”)

5. No temporary differences existed at the end of 2024. Zheng 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 2025, and indicate how it should be classified on the statement of financial position.

b. Prepare the journal entry to record income taxes for 2025.

c. Draft the income tax section of the income statement for 2025, 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 2026, and indicate how they should be classified on the statement of financial position.

e. Prepare the journal entry to record income taxes for 2026.

f. Draft the income tax section of the income statement for 2026, beginning with “Income before income taxes.”