A06 IntermediateAccounting IIPart A (40 points) Colorado Companyhas provided you the following information.Year Taxable income Income tax rate2014 $390,000 35% 2015 $320,000 37%2016 $400,000 40%2017 ($1,200,000) 40%Colorado Company has decided to use the loss carryback andcarryforward provision as a result of the year 2017 loss. The enacted tax rateremains at 40% after year 2017. Colorado Company has determined that avaluation allowance is not necessary.Prepare the journal entry on December 31, 2017 to record thecarryback and carryforward decision.Part B (30 points)The Matrix Company began operations as of the beginningof 2015. During 2015, Matrix reported GAAP (book) incomebefore taxes of $789,500. For income tax purposes, depreciation expense was$150,000; for GAAP (book) purposes, depreciation expense was $74,000. Matrixaccrued $900,000 of revenue for GAAP (book) purposes during 2015; $600,000 ofthe accrued revenue was taxable during 2015. Matrix earned interest of $79,800from a municipal bond investment during 2015. Matrix’s marginal income tax rateis 40%. Matrix did not make any income tax payments during 2015.a. Determine Matrix’s taxable income for the year ended December 31, 2015.b. Prepare the 2015 year-end journal entryto record income tax expense.Part C (30 points)a. For each of the items below,determine whether the items are temporary differences or permanent differences.Also, for each temporary difference, you are required to determine whether adeferred tax asset or deferred tax liability is created by the temporary differencedescribed. Assume that each of the temporary differences described is an originatingdifference. 1. Municipal bond interest2. Accrued warranty expense3. Sales revenues received in advance4. Prepaid insurance where the tax deduction in future years will be lessthan the book expense 5. Tax depreciation expense exceeds GAAP (book) depreciation expense6. Accrued bad debt expense7. The dividends received deduction8. Installment sales revenue (recognized currently for GAAP, recognizedfor tax purposes when cash is collected in future years)9. Life insurance payments for executives for which the company is thebeneficiary10. Fines paid for law violationsb. Explain why temporary differences result in deferred tax assets ordeferred tax liabilities while permanent differences do not, and describe thedifference in the formation of deferred tax assets and deferred taxliabilities.
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