Question

At the end of 2020, its first year of operations, Wesley Co. prepared a reconciliation between pretax financial income and taxable income as follows: Pretax financial income $ 520,000 Extra depreciation taken for tax purposes (1,200,000) Estimated expenses deductible for taxes when paid 890,000 Taxable income $ 210,000 Use of the depreciable assets will result in taxable amounts of $400,000 in each of the next three years. The estimated litigation expenses of $890,000 will be deductible in 2023 when settlement is expected.

Instructions (a) Complete the following schedule of future taxable and deductible amounts: 2020 2021 2022 2023 Future taxable (deductible) amounts: Extra depreciation Litigation

(b) Prepare the journal entry to record income tax expense, deferred taxes, and income taxes payable for 2020, assuming a tax rate of 40% for all years. Clearly show a separate calculation of each dollar amount.

Assume:

1) Taxable income is $600,000 in 2021,

2) no other differences between book and taxable income, and

3) the tax rate remains at 40%. Prepare the journal entry to record income tax expense, deferred taxes, and income taxes payable for 2021. Clearly show a separate calculation of each dollar amount.