Accounting 3230 Spring 2025 Problem Set #3 - The Last Problem Set Due Date: 1 May 2025 (Thursday) 11:59 p.m. l. Accounting for Income Taxes (52 points) Pickett, Inc. began 2024 with the following balances in deferred tax accounts: Deferred Tax Assets VA for DTA Deferred Tax Liabilities $90,000 (DR) $6,000 (CR) $81,000 (CR) The deferred tax asset results from a balance of $250,000 in Warranty Liability and an Estimated Litigation Liability of $50,000. The deferred tax liability results from the financial accounting bases of depreciable assets exceeding the tax bases of depreciable assets by $220,000 due to excess MACRS depreciation over straight-line in previous years and an Installment Receivable of $50,000 that will be collected upon and taxed in 2024. Pre-tax accounting income in 2024 and 2025 is $70,000 and $100,000, respectively and includes non-taxable municipal bond interest of $30,000 in 2024 and $35,000 in 2025. During 2024 MACRS (tax) depreciation exceeded straight-line (financial) depreciation by $40,000. In 2025, straight-line depreciation exceeded MACRS (tax) depreciation by $15,000. In 2024, Pickett settled the legal contingency by paying the plaintiff $50,000. Also in 2024, Pickett incurred actual costs to repair products associated with warranties of $320,000, though warranty expense was $250,000. For 2025, warranty expenses totaled $360,000 and costs to repair under warranty were $320,000. Pickett received $40,000 in deferred (unearned) revenue in 2024 which will be earned evenly over 2025 and 2026. At the end of 2024, management estimated that the DTA Valuation Allowance account should have a balance of $10,000. Pickett's management decided that at the end of 2025, the valuation allowance should be 5% of the Deferred Tax Asset balance. The tax rate was 30% for 2024, but during 2024 the U.S. Congress changed the applicable tax rate to 21% for 2025 and all subsequent years. In the event of a net operating loss, use the tax rule under the TCJA related to NOLs: NOL carry forward and 80% limitation. (a) Calculate taxable income for 2024 and 2025. (b) Calculate the balances in Deferred Tax Asset, Deferred Tax Liabilities, and VA for DTA as of 31 Dec 2024 and 31 Dec 2025. (c) Determine Income Tax Expense or Benefit for 2024 and 2025. (d) Record the journal entries for income tax recognition that would be made as of the end of 2024 and 2025. (c) Calculate the effective tax rates for 2024 and 2025, (f) Prepare the bottom of the income statement for Pickett just for 2024, beginning with 'Income before Income Taxes' you do not need to separate income tax expense or benefit into current and non-current portions