Part A (40 points)
has provided you the following information.
Year Taxable income Income tax rate
2014 $390,000 35%
2015 $320,000 37%
2016 $400,000 40%
2017 ($1,200,000) 40%
Colorado Company has decided to use the loss carryback and
carryforward provision as a result of the year 2017 loss. The enacted tax rate
remains at 40% after year 2017. Colorado Company has determined that a
valuation allowance is not necessary.
Prepare the journal entry on December 31, 2017 to record the
carryback and carryforward decision.
Part B (30 points)
The Matrix Company began operations as of the beginningof 2015. During 2015, Matrix reported GAAP (book) income
before taxes of $789,500. For income tax purposes, depreciation expense was
$150,000; for GAAP (book) purposes, depreciation expense was $74,000. Matrix
accrued $900,000 of revenue for GAAP (book) purposes during 2015; $600,000 of
the accrued revenue was taxable during 2015. Matrix earned interest of $79,800
from a municipal bond investment during 2015. Matrix’s marginal income tax rate
is 40%. Matrix did not make any income tax payments during 2015.
a. Determine Matrix’s taxable income for the year ended December 31, 2015.
Prepare the 2015 year-end journal entry
to record income tax expense.
Part C (30 points)
For each of the items below,
determine whether the items are temporary differences or permanent differences.
Also, for each temporary difference, you are required to determine whether a
deferred tax asset or deferred tax liability is created by the temporary difference
described. Assume that each of the temporary differences described is an originating
1. Municipal bond interest
2. Accrued warranty expense
3. Sales revenues received in advance
4. Prepaid insurance where the tax deduction in future years will be less
than the book expense
5. Tax depreciation expense exceeds GAAP (book) depreciation expense
6. Accrued bad debt expense
7. The dividends received deduction
8. Installment sales revenue (recognized currently for GAAP, recognized
for tax purposes when cash is collected in future years)
9. Life insurance payments for executives for which the company is the
10. Fines paid for law violations
b. Explain why temporary differences result in deferred tax assets or
deferred tax liabilities while permanent differences do not, and describe the
difference in the formation of deferred tax assets and deferred tax