Question

At the end of 2016, its first year of operations, Beattie Company reported taxable income of $39,000 and pretax financial income of $34,200. The difference is due to the way the company handles its warranty costs. For tax purposes, Beattie deducts the warranty costs as they are paid. For financial reporting purposes, Beattie provides for a year-end estimated warranty liability based on future expected costs. Beattie is subject to a 30% tax rate for 2016, and no change in the tax rate has been enacted for future years. Based on verifiable evidence, the company decides it should establish a valuation allowance of 70% of its ending deferred tax asset.

Required:

1.	Prepare Beattie’s income tax journal entry at the end of 2016.
2.	Prepare the lower portion of Beattie’s 2016 income statement.

CHART OF ACCOUNTS
Beattie Company
General Ledger
ASSETS 111 Cash 121 Accounts Receivable 141 Inventory 152 Prepaid Insurance 160 Deferred Tax Asset 169 Allowance to Reduce Deferred Tax Asset to Realizable Value 181 Equipment 198 Accumulated Depreciation LIABILITIES 211 Accounts Payable 231 Salaries Payable 250 Unearned Revenue 260 Deferred Tax Liabilities 261 Income Taxes Payable EQUITY 311 Common Stock 331 Retained Earnings	REVENUE 411 Sales Revenue EXPENSES 500 Cost of Goods Sold 511 Insurance Expense 512 Utilities Expense 521 Salaries Expense 532 Bad Debt Expense 540 Interest Expense 541 Depreciation Expense 559 Miscellaneous Expenses 910 Income Tax Expense

Prepare Beattie’s income tax journal entries on December 31 to record the income tax expense for the year and to record the allowance to reduce deferred tax asset to realizable value. Additional Instructions

PAGE 1

GENERAL JOURNAL

	DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
1
2
3
4
5

Amount Descriptions
Income before income taxes
Net income
Net loss

Prepare the lower portion of Beattie’s 2016 income statement. Additional Instructions

BEATTIE COMPANY

Partial Income Statement

For the Year Ended December 31, 2016

1
2
3

Answer 1

DATE	ACCOUNT TITLE	POST. REF.	DEBIT	CREDIT
31-Dec	Income Tax Expense ($11,700 - $1,440)	910	10260
	Deferred Tax Asset (39000-34200)*.3	160	1440
	Income Taxes Payable ($39,000 x 0.30)	261		11700
31-Dec	Income Tax Expense	910	1008
	Allowance to Reduce Deferred Tax Asset to Realizable Value	169		1008
	1440*.7

BEATTIE COMPANY Partial Income Statement For the Year Ended December 31, 2016
Income before income taxes	34200
Income tax expense	11268
Net income	22932