ABC uses MACRS $($an accelerated depreciation system$)$ for tax purposes and straight$-$line depreciation for book purposes. It recorded $$10,000$ in depreciation expense each year for book purposes. For tax purposes, it recorded $$17,000,$ $$12,000,$ and $$9,000$ in Years $1,2,$ and $3,$ respectively.

ABC uses the allowance method to recognize bad debt expense for book purposes and the direct write$-$off method for tax purposes. Under the allowance method, ABC recognized $$5,000,$ $$7,000,$ and $$6,500$ of bad debt expense in Years $1,2,$ and $3,$ respectively, for book purposes. It recognized $$0,$ $$4,600,$ and $$6,000$ of bad debt expense in Years $1,2,$ and $3,$ respectively, for tax purposes.

ABC recorded a $$5,000$ contingent litigation liability in Year $2$ for book purposes.

In each year, the firm received municipal interest of $$1,000.$

ABC operates only in one taxing jurisdiction, and its statutory tax rate is $35\%.$ The firm assesses that it will not need a valuation allowance for any deferred tax assets.

The following is the partial income statement and selected balance sheet for both book and tax reporting purposes for each of the $3$ years.

Requirements:

What is ABC$$s income tax provision for each of the $3$ years? Calculate the tax difference and prepare the journal entries required to record the income tax provision for the first $3$ years of operation.

Instructions:

Compute the balance of ABC$$s deferred tax accounts by comparing the tax basis of the underlying assets and liabilities to the book carrying values for each difference. Show your calculations.

Provide a summary of book$-$tax differences and calculate the total deferred tax expense for each year.

Compute the income taxes payable based on taxable income and the income tax expense based on book income, adjusted for permanent differences.

Prepare the yearly journal entries to record the income tax expense, income tax payable, and any applicable deferred tax assets$/$liabilities$.$