ABC Inc., is using IFRS, provided the following information about its first three years of operations.

In its first year of operations, the company used installment sales to promote its products. The company reported $4,000 in installment sales gross margin for the period. It did not have any installment sales for the next two years. ABC cash collection pattern on the installment sales was 15%, 25% and 60% in the first year, second year, and third year respectively.

ABC uses the straight-line depreciation for book purposes and recorded $10,000 in each of the first three years as depreciation expense. For tax purposes, it recorded $17,000, $12,000, and $9,000 of capital cost allowance in each of the first three years respectively.

ABC uses the allowance method to recognize bad debt expense for accounting purposes and recognized $5,000, $7,000, and $6,000 of bad debt expense in each of the three years. For tax purposes, it was permitted to deduct only the actual account receivable write-offs (i,e., actual losses incurred). Accordingly, deductible amounts were $0, $4,600, and $6,500 of bad debt expense in each of the first three years respectively.

ABC recorded a $6,000 contingent litigation liability in year 1 for accounting purposes. This was disallowed for tax purposes and which would be deductible only when the liability is paid. In Year 3, it paid $1,200 of this liability

In each year, the firm received $1,000 as a municipal subsidy given to new startup enterprises. These are non-taxable subsidies.

ABC reported accounting income before tax of $18,000, $13,300 and $26,500 respectively in each of its first three years.

Assume that ABC operates in only one tax jurisdiction and its statutory tax rate in year 1 was 35%. However during year 2, the government enacted a change in tax rate to 40% for year 2 and following years.

Required:

1. Prepare reconciliations between financial and taxable incomes for each of the first three years and the amount of income tax payable in each year.

2. Prepare all income tax related journal entries for year 1 and 2 only.