Question Details

(solution) Canter, Gallop and Jump, Inc. began operations in 2011. In 2012,


Canter, Gallop and Jump, Inc. began operations in 2011.  In 2012, pretax financial income was $125,000, which included the following:

  • General liability and property insurance expense of $120,000, representing one-fourth of a $480,000, four-year casualty and liability insurance policy paid for entirely in 2012.
  • Insurance premiums expense of $75,000 on life insurance policies for key company officers.  The company is named as the beneficiary on the policy.
  • Investment income of $150,000, of which $67,500 is municipal bond interest income.
  • Accrued warranty expense of $200,000.  Actual warranty expenditures are expected to be $75,000 in 2013, $50,000 in both 2014 and 2015, and $25,000 in 2016.
  • One piece of equipment with a five-year useful life was acquired in 2011. The equipment cost $500,000 and has no salvage value. Depreciation is recorded using the straight-line method for financial reporting purposes.  MACRS (Modified Accelerated Cost Recovery System) is used on the tax return. The table below shows depreciation for book and tax purposes. 
Depreciation Year Book Depreciation Tax Depreciation
2011 $100,000 $200,000
2012 $100,000 $125,000
2013 $100,000 $100,000
2014 $100,000 $50,000
2015 $100,000 $25,000

Total

$500,000 $500,000

Additional information:

  • The enacted tax rates are 20% in 2011 and 2012, 30% in 2013, and 35% beyond 2013.  Round all journal entries and computations to the nearest whole dollar.

 


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