Problem: Permanent and Timing Differences/Tax Rate Changes

Martin Inc. purchased machinery at the beginning of 20X0 for $120,000. For financial reporting purposes, management used the straight-line method to depreciate the cost and sum of the years digits ($80,000 and $40,000) to depreciate the cost for tax purposes. The life of the machinery was estimated to be two years and the salvage value was estimated at zero. Revenues less expenses other than depreciation and tax expense equaled $600,000 for 20X0 and 20X1. Martin pays income tax at the rate of 20% of taxable income. Included in the income number for each year was $40,000 of tax-free municipal bond interest. (As with the previous problem, this one has a similar cascade effect. For partial credit LABEL and show the calculations.)

Required:

1. Compute the IRS taxable income and the financial reporting/GAAP taxable income (before tax) for the years 20X0 and 20X (6 pts.)

2. Complete the following table based on your answer to requirement 1. (2 pts for each cell; 12 total)

Year	End. Bal. in Tax Liability	Tax Expense	End. Bal. in Deferred Inc. Taxes
20X0
20X1

3. Assume that the tax rate was changed by the federal government to 30% effective the beginning of 20X1. Also assume the change was known in 20X0. Compute the following amounts and give the related journal entry for 20X1 (6 pts. Total):
   1. Deferred income taxes
   2. Income tax liability for 20X1 (also known as the current provision for income taxes)
   1. Income tax expense for 20X1

Extra Credit

4. Assume the same details as above except that the tax rate change was not known until 20X1. Compute the following amounts and give the related journal entry, for 20X1. (4 possible additional points)
   1. Deferred income taxes
   2. Income tax liability for 20X1
   3. Income tax expense for 20X1.