Flynn Inc. has two temporary differences at the end of 2012. The first difference stems from installment sales, and the second one results from the accrual of a loss contingency. Flynn's accounting department has developed a schedule of future taxable and deductible amounts related to these temporary differences as follows.

2013 2014 2015 2016
Taxable Amounts $ 40,000 $ 50,000 $60,000 $90,000
Deductible Amounts (15,000) (19,000)
$40,000 $35,000 $41,000 $90,000

As of the beginning of 2012, the enacted tax rate is 34% for 2012 and 38% for 2013-2017. At the beginning of 2012, the company had no deferred income taxes on its balance sheet. GAAP pre-tax income and taxable income for 2012 is $400,000. Taxable income is expected in all future years. GAAP pretax income for 2013 is $10,000. In addition, in 2013, the company paid fines/penalties of $3,000 for late filing of its payroll taxes.

Required:

(a) Prepare journal entries to record income taxes for 2012 and 2013. Assume in 2012, management believed the company would benefit from the loss contingency; in 2013, management believes that the loss contingency probably will not occur and the company won't benefit.

(b) Prepare the balance sheet disclosure pertaining to the deferred taxes. Assume the related asset and liabilities that caused the temporary differences are classified as noncurrent items on the balance sheet.

(c) Prepare the income statement for 2012 and 2013, beginning with Income before income taxes.