Part II: Goody Inc. has no deferred tax asset or liability prior to 2010. Its pretax financial income for 2010 and 2011 is: 2010 $750,000 2011 920,000 The following items caused the only differences between pretax fmancial income and taxable income.

1. In Jan. 1, 2010, the company pays at once $48,000 of 3 years rent through 2012 for a leased warehouse.

2. The company pays, for environmental problems, $30,000 fine in 2010 and $35,000 fine in 2011.

3. The company receives $25,000 from its investment in municipal bonds in 2011.

4. In 2011, the company terminated a top executive and agreed to $510,000 of severance pay. The amount will be paid evenly per year from 2011-2013. The 2011 payment was made. The total severance pay was expensed in 2011. The enacted tax rates existing at December 31, 2010 are:

2010 30%

2011 40%

2012 45%

2013 50%

INSTRUCTIONS:

(a) Determine taxable income for 2010 and 2011.

(b) Prepare the journal entry to record income taxes for 2010 and 2011.

(c) Prepare the income tax expense section of the income statement for the year ended December 31, 2010 & 2011. (d) Show how the deferred income taxes should be reported on the balance sheet at Dec. 31, 2011.