Required:
A. Prepare the year-end tax entry for each year. You can either prepare separate entries or combine them into one aggregate entry. Assume that the tax entries are only prepared at the end of the year, i.e., not at the time of the individual transaction.
B. Prepare a schedule showing the computation of before tax income and taxable income (See example below).
C. Prepare the schedule of year-end debarred tax assets and liabilities for each year. The schedule should separately list the sources of the firm's ending deferred tax assets and deferred tax liabilities by their source. For example, the deferred tax asset/liability associated with the book/tax difference associated with the lease should be listed as a single source. The total for each schedule should equal the firm's deferred tax asset and deferred tax liability balance at the end of the year.
D. Prepare a schedule reconciling the Statutory Tax Rate to the Effective Tax Rate (See example below).
Assume the following tax regulations:
1. Leases are taxed as short-term rentals. Lessees receive a deduction for rental payments and lesson treat rental payments received as taxable income. The owner of the property depreciates the property.
2. The firm receives a deduction equal to the employee's gain on the exercise of the option when the option is exercised and a deduction for value of restricted share units when the restrictions elapse.
3. Interest income on the municipal bond is tax exempt.
4. Income from investments in equity securities is taxable when shares are sold and when dividends are received.
5. Billed service revenue is taxable when billed.
6. Advance payments for service revenue are taxed when received.
7. Insurance premium payments are deductible when paid.
8. Firms are allowed deductions for bad debt write-offs, but not for estimated bad debt expense.
Other Information:
1. The firm determines that a valuation allowance equal to 10% of its ending deferred tax assets is appropriate.
2. Combine all lease expenses into one "Lease Expense" line item.
3. Assume that year 1 is the first year of operations, i.e., there are no beginning balances.
4. Note that the firm provides services to customers. In some cases the customers are billed after the services are performed generating accounts receivable. In other cases customers prepay for the services generating unearned revenue.
5. Assume a constant 30% tax rate.
6. Assume that income taxes are all paid the following year. In other words, use "Income Taxes Payable" in your year-end journal entry. You do not have to show the entry for the payment of taxes the following year.
7. Round all dollar amounts to the nearest dollar.
Beginning of Year 1
1. The firm leased farmwife from a lessor for 5 years. The lease requires 5 annual payments of $120,000 on January 1 of each year, with the first payment due immediately. The firm's incremental borrowing rate is 6% and the firm does not know the implicit rate. The furniture has a useful life of 6 years. The lease is properly classified as a financing lease.
2. Purchased a municipal bond for its face value of $400,000. The bond has a coupon rate of 6% (payable December 31 of each year), and a five-year maturity. The bond is accounted for as a "held to maturity" debt security.
3. Issued 6,000 restricted share units and 10,000 stock options to employees. The shares are currently trading for $10 per share. The option exercise price is set equal to 510 and the fair value of each option is $3. The vesting service period for the restricted share units and stock options is 18 months.
4. The firm purchased 30% of C Corp. for $630,000. At the time C. Corp. reported assets with a net book value of $2,000,000. The firm accounts for the securities using the equity method. The $100,000 excess of the implied fair value over book value is attributable to inventory. C. Corp. uses the FIFO inventory method for inventory.
5. Presided employees a defined benefit pension plan. The under the plan, each employee will receive annual retirement benefits equal to [2% x Number of years of service x Final salary (expected to total $5,000,000)]. We expect each employee to work for 20 years (from the beginning year 1) until retirement and to receive retirement benefits for 15 years. The actuary uses an annual 5% discount rate and the trustee uses a 6% expected rate of return.
You are provided with the following information for Years 1 and 2
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Year 1
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Year 2
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C Corp. Income
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$300,000
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$500,000
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C Corp. Dividends
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$120.000
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$140,000
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|
Pension contributions (made at year-end)
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$230.000
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$200,000
|
|
Billed service revenue
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$3,500,000
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$4,000,000
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|
Cash salaries paid
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$3,100,000
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$4,200,000
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Advanced payments received
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$1,200,000
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$1,300,000
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Write-offs during the year
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$8,000
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$32,000
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Insurance premiums paid
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$70,000
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$80,000
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You are also provided with the following year-end balances
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Year 1
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Year 2
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Unearned revenue
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$400,000
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$300.000
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Allowance for doubtful accounts
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$20,000
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$22,000
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Prepaid Insurance
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$30,000
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$5,000
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Other information:
A. At the end of year employees exercised 4,000 options. The fair value of the fan's stock on this date is $19 per share- The firm's stock had a value of $13 per share on June 30 of Year 2 when the restricted stock units and the stock options vested.
B. The firm expects all of the employees receiving restricted share units and stock options will remain for the 18 month required service period.
C. Each year the actual return on plan assets equals the expected return.
D. The firm receives a $30.000 tax credit for domestic business activity each year. The credit provides a dollar-for-dour reduction in the firm's tax liability.
Attachment:- Examples.rar