The following information is taken from the financial statements of Columbia, Inc. Year Taxable and Pre-tax GAAP Income Income tax rate Income tax paid 2006 $24,000 40% $ 9,600 2007 $27,400 40% $10,960 2008 $31,500 34% $10,710 2009 $21,240 34% $7,222 Note: there were no temporary or permanent differences in the above years between GAAP and taxable income. For the current year, 2010, the pre-tax GAAP income is $12,000. Included in this figure is a fine/penalty the company paid of $3,500 that is non-deductible for income tax purposes. Also, included in this figure is $95,000 that the company recorded of gross profit from an installment sale that was deferred for income tax purposes until the installments are collected. The collections are expected to occur as follows: 2011 $25,000; 2012 $27,000; 2013 $22,000; 2014 $21,000. The current tax rate is 34% and the future enacted tax rate is 35% beginning in 2011. The company always carries back any net operating loss that may occur and management does not believe any valuation allowance is needed for a deferred tax asset that may arise. Required: 1. Prepare the journal entries for 2010 pertaining to income taxes. 2. What would be reported on the income statement for 2010, starting with income from operations before tax? 3. Briefly discuss the following: i. Assume management believes that only half of any deferred tax asset will probably be used in the future. What would you advise the client? ii. Ignoring i. discuss whether you would advise management to carry back the net operating loss in 2010 or elect to forego a carry back in order to carry forward the net operating loss for this company. Assume 2011 GAAP pre-tax income is estimated to be $30,000 and there will only be the one temporary difference referenced above for the installment sale.
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