Question - You are the new controller for GO CORPORATION.  This is GO's first year of operations and everything went much better than anyone anticipated.  It went so well, that your pre-tax profits for the year were $5,000,000.  Unfortunately, no one bothered to pay any income taxes (federal or state) for the whole year because they were all so busy growing the business and never thought they were making a GAAP profit.  The CFO has put you in charge of calculating and accounting for all of the income tax balances, including the balance sheet and income statement amounts.  Not knowing where to start, you began by looking at the trial balance (post-adjusting entries with the exception of the tax entries).  You found, as suspected, that there are no income tax accounts on the trial balance, which means you have to create them all somehow by tomorrow afternoon.  After a bit of reflection and a review of the trial balance, you have found the following information which you think, but are not sure, is relevant.  You then call your sister who happens to be a CPA for help.  After agreeing on a fee of $900/hour, she agrees to come help you that evening.

TRIAL BALANCE INFORMATION DR/(CR)

Accounts receivable             2,000,000

AFDA                                  (300,000)

Accrued Vacation                (200,000)

Deferred revenue                 (1,000,000)

Fixed Assets                        3,000,000

Accum Depr                         (150,000) (10 year book life using ½ year convention SL)

Officer life insurance

Expense                             100,000

Meals & Entertainment

Expense                             500,000

Your sister tells you that for tax purposes, the governments (both federal and state to make it easy) require you to use the Modified Accelerated Cost Recovery System (MACRS) for tax depreciation purposes (whatever that is).  You google it and find out that the type of fixed assets you own require you to use the double declining balance method, ½ year convention, and 5 year life.  The federal tax rate (we are ignoring completely the graduated rate brackets for simplicity) is 35% and since you only do business in California, the state rate is 8.84% on your taxable income.  Your sister also tells you that your state taxes are currently deductible on your federal tax return (can this get any harder?).

a. Calculate and prepare journal entries to record your current taxes payable (separately show federal and state) and your current income tax expense or benefit.

b. Calculate and prepare journal entries to record your deferred tax asset and/or liabilities and deferred tax expense or benefit.

c. State your net total tax expense or benefit and calculate the effective tax rate on your pre-tax income.