1. EMC began operations during 2004

1. EMC began operations during 2004. Taxable income in 2005 was $829,000. Basis differences as of 12/31/04 and 12/31/05 are as follows:

Description of difference 12/31/04 12/31/05

Property, Plant, & Equipment, net:

GAAP basis $1,102,000 $1,880,000

Tax basis 1,000,000 1,800,000

Basis difference $102,000 $80,000

Investments – Trading

GAAP basis (fair value) $785,000 $823,000

Tax basis (cost or amortized cost) 903,000 948,000

Basis difference ($118,000) ($125,000)

The enacted income tax rate is 40% for 2004 and all future years.

Requirement:

Prepare the income tax journal entries that EMC should make for the year ended 12/31/05.

2. For the current year ($ in millions), Centipede Corp. had $80 in pretax accounting income. This included meals and entertainment expense of $8 and $20 in depreciation expense. For income tax purposes, MACRS depreciation amounted to $23.

1) What type of differences, permanent differences or temporary differences, does Centipede Corp. have for the current year?

2) Prepare Centipede’s journal entry to recognize income taxes payable for the current year. Assume there were no other temporary or permanent differences. Centipede’s tax rate for all relevant years is 40%.

3) Centipede’s comparative balance sheets for two previous years show the following balances for deferred tax assets and liabilities:

12/31/06 12/31/05

Deferred Tax Asset $3 million $1.4 million

Deferred Tax Liability $6 million $4.8 million

Prepare Centipede’s deferred tax journal entry for the year ended 12/31/06. Note that you do not have enough information to determine how Centipede calculated its DTA and DTL balances.