Question & Answer: Assume the following facts for Stockton Corporation in 2017. Stockton reported pretax financial income of $332,000. In a…..

Assume the following facts for Stockton Corporation in 2017. Stockton reported pretax financial income of $332,000. In addition, Stockton reported the following differences between pretax financial income and taxable income:

– Straight line depreciation used for book purposes was $58,000. MACRS tax depreciation expense for 2017 is determined at $74,000.

– Gift cards totaling $12,000 were sold at the end of 2017. Stockton estimates that this revenue will all be earned in 2018.

– IRS penalties totaling $15,000 were assessed and paid in 2017. The penalties were properly included in arriving at pretax financial income of $332,000.

– Warranty expense of $25,000 was deductible for tax purposes, but in determining 2017 pretax financial income, but $33,000 was recognized in arriving at pretax financial income. The tax rate for all years was 35%. Assume there were no deferred income tax assets/liabilities at the start of 2017.

Required:

a. Calculate the amount of 2017 taxable income.

b. Prepare Stockton’s income tax journal entry for 2017.

c. Calculate Stockton’s effective tax rate for 2017. Why is the effective rate different than the statuory rate of 35%?