XYZ is a calendar year, accrual basis C corporation headquartered in St. Paul that provides advertising services to tour and travel companies. Assume that XYZ’s 2016 financial (book) income before tax is $2,000,000. XYZ has been in existence for five years and has deferred tax assets arising from prior year accounts receivable and deferred tax liabilities arising from depreciation on its 2015 financial balance sheet.
The following items have been included in XYZ’s 2016 pre-tax financial (book) income:
· $80,000 from a two-year advertising contract. Under the terms of the two-year contract, XYZ started providing advertising services on September 1, 2016 to a major Minnesota tour and travel company and received its entire advertising fee of $480,000 on that date.
· $10,000 of tax-exempt municipal bond interest from City of Minneapolis highway improvement bonds.
· Life insurance premiums paid on key officers amounted to $5,000.
· $15,000 increase to its allowance for doubtful accounts; actual bad debts written off amounted to $25,000.
· $20,000 contributions to political campaigns.
· $150,000 straight-line financial depreciation; total federal tax depreciation amounted to $100,000.
· $20,000 of substantiated meals and entertainment expenses.
· $2,000 Federal Trade Commission fine paid for deceptive advertising practices.
a. What amount of advertising income would XYZ report on its financial (book) income statements in 2017 and 2018 from the two-year advertising contract? Please show your work and explain your calculations.
b. What amount of advertising income would XYZ report on its 2016 federal income tax return from the two-year advertising contract? What amount of advertising income would XYZ report on its federal income tax returns in 2017 and 2018 from the two-year advertising contract? Please show your work and explain your calculations.
c. Identify which items of XYZ in 2016 (on the previous page) are permanent book/tax differences and which items are temporary book/tax differences.
d. What is XYZ’s 2016 federal taxable income and federal income tax liability? Please show your work and explain your calculations.
e. What is XYZ’s 2016 federal income tax expense for financial income statement purposes? Please show your work and explain your calculations.
f. Prepare the journal entry to record XYZ’s 2016 federal income tax expense, federal income tax payable, and any adjustments to the deferred tax asset and deferred tax liability accounts you think should be made.