Problem 1:
Permtemp Corporation formed in 2013 and, for that year, reported the following book income statement and balance sheet, excluding the federal income tax expense, deferred tax assets, and deferred tax liabilities:
Sales $20,000,000
Cost of goods sold) (15,000,000)
Gross profit $ 5,000,000
Dividend income 50,000
Tax-exempt interest income 15,000
Total income $ 5,065,000
Expenses:
Depreciation $ 800,000
Bad debts 400,000
Charitable contributions 100,000
Interest 475,000
Meals and entertainment 45,000
Other 3,855,000
Total expenses) 5,675,000
Net loss before federal income taxes $ (610,000)
Cash $ 500,000
Accounts receivable $ 2,000,000
Allowance for doubtful accounts) (250,000) 1,750,000
Inventory 4,000,000
Fixed assets $10,000,000
Accumulated depreciation) (800,000) 9,200,000
Investment in corporate stock 1,000,000
Investment in tax-exempt bonds 50,000
Total assets $16,500,000
Accounts payable $2,610,000
Long-term debt 8,500,000
Common stock 6,000,000
Retained earnings) (610,000)
Total liabilities and equity $16,500,000
Additional information for 2013:
The investment in corporate stock is comprised of less-than-20%-owned corporations.
Depreciation for tax purposes is $1.4 million under MACRS.
Bad debt expense for tax purposes is $150,000 under the direct writeoff method.
Limitations to charitable contribution deductions and meals and entertainment expenses must be tested and applied if necessary.
Qualified production activities income is zero.
Required for 2013:
a. Prepare page 1 of the 2013 Form 1120, computing the corporations NOL.
b. Determine the corporations deferred tax asset and deferred tax liability situation, and then complete the income statement and balance sheet to reflect proper GAAP accounting under ASC 740. Use the balance sheet information to prepare Schedule L of the 2013 Form 1120.
c. Prepare the 2013 Schedule M-3 for Form 1120.
d. Prepare a schedule that reconciles the corporations effective tax rate to the statutory 34% tax rate.
Note: For 2013 forms, go to forms and publications, previous years.
For 2014, Permtemp reported the following book income statement and balance sheet, excluding the federal income tax expense, deferred tax assets, and deferred tax liabilities:
Sales $33,000,000
Cost of goods sold) (22,000,000)
Gross profit $11,000,000
Dividend income 55,000
Tax-exempt interest income 15,000
Total income $11,070,000
Expenses:
Depreciation $ 800,000
Bad debts 625,000
Charitable contributions 40,000
Interest 455,000
Meals and entertainment 60,000
Other 4,675,000
Total expenses) (6,655,000)
Net income before federal income taxes $ 4,415,000
Cash $ 2,125,000
Accounts receivable $ 3,300,000
Allowance for doubtful accounts (450,000) 2,850,000
Inventory 6,000,000
Fixed assets $10,000,000
Accumulated depreciation (1,600,000) 8,400,000
Investment in corporate stock 1,000,000
Investment in tax-exempt bonds 50,000
Total assets $20,425,000
Accounts payable $ 2,120,000
Long-term debt 8,500,000
Common stock 6,000,000
Retained earnings 3,805,000
$20,425,000
Additional information for 2014:
Depreciation for tax purposes is $2.45 million under MACRS.
Bad debt expense for tax purposes is $425,000 under the direct writeoff method.
Qualified production activities income is $3 million.
Required for 2014:
a. Prepare page 1 of the 2014 Form 1120, computing the corporations taxable income and tax liability.
b. Determine the corporations deferred tax asset and deferred tax liability situation, and then complete the income statement and balance sheet to reflect proper GAAP accounting ASC 740. Use the balance sheet information to prepare Schedule L of the 2014 Form 1120.
c. Prepare the 2014 Schedule M-3 for Form 1120.
d. Prepare a schedule that reconciles the corporations effective tax rate to the statutory 34% tax rate.