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In 2016, Waverly Corp. had pretax financial income of $66,000. This income included the following:

1. Life Insurance Premiums expense related to the companys coverage of the CEO. Waverly is the beneficiary of the policy. The 2016 premiums were $15,000.

2. Depletion taken in excess of depletion for financial reporting purposes of $10,000.

3. MACRS depreciation of $40,000.

4. Depreciation taken in the financial statements of $48,000.

5. Estimated product warranty expense recorded in the financial statements of $27,000.

6. Actual warranty costs paid of $20,000.

7. Excess of accrual based sales over cash based sales of $11,000.

8. Interest revenue on investments in municipal bonds of $25,000.

The future taxable and deductible amounts at the end of 2016 for the temporary differences are:

Future Taxable Amounts:

Depreciation Difference $33,800

Accrual-basis vs cash-basis excess $26,700

Future Deductible Amounts

Warranties $56,500

At the beginning of 2016, Waverly had a deferred tax liability of $12,540 related to depreciation differences and $4,710 related to cash versus accrual sales. Waverly also had a deferred tax asset at the beginning of 2016 of $14,580 related to the warranty difference. The current and future tax rates is 30%.

REQUIRED:

1. Prepare a schedule to find Waverlys Taxable Income.

2. Prepare the tax journal entry for Waverly for 2016.

3. What would be different if Waverly expected to only be able to realize 40% of any Deferred Tax Assets?

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