A firm has all of the following differences at once: nontaxable interest, depreciation, and bad debt expense.

• Income before interest, depreciation, warranty expense, and taxes is $300 each year.
• Municipal bond interest is $15 each year.
• A $100 asset was acquired at the beginning of Year 1, and is depreciated over four years straight-line for GAAP. The asset is a 3-year MACRS asset for tax. 3-year MACRS percentages: 33.33%, 44.45%, 14.81%, 7.41%
• Bad debt expense is $50 in Year 1 and deductions for bad debt are $20 in Years 2 and 3 and $10 in Year 4.

The tax rate is 30% in Years 1 and 2. During Year 2, the tax rate was changed to 20%, effective beginning in Year 3.

Requirements:

1. Prepare a table with columns for each year (Years 1 through 4), showing the calculations for (1) pretax accounting income, (2) taxable income, and (3) taxes payable. Round all amounts to cents, not whole dollars.
2. Which book-tax differences are temporary, and which are permanent?
3. For each temporary difference, identify the underlying balance sheet account that causes the temporary difference. (This is NOT the deferred tax account.)
4. For each temporary difference, create a table that shows for each year (1) the balances in the underlying balance sheet account for book and tax, (2) the balance of the temporary difference, (3) the balance of the deferred tax item, and (4) the change to the deferred tax account.
5. Prepare the journal entries to record income taxes for each year.
6. Compute the effective tax rate for each year.