You have been asked to prepare the 2016 required income tax accounting provision calculations for Graham Corporation (“GC”), a C Corporation.
You receive the following information:
Deferred tax account balances at beginning of year (12/31/2015):
Deferred tax liability for tax over book depreciation - $500,000
Deferred tax asset for bad debt reserves - $200,000
Deferred tax asset for inventories of $300,000 due to UNICAP adjustments
Deferred tax asset for book reserves related to retiree medical benefits - $500,000
GC has recorded a Valuation Allowance related to retiree medical benefits of $500,000
Graham Corporation has pre-tax book income of $5,000,000 for the year ended 12/31/2016.
GC has earned $200,000 in municipal bond interest
GC has meals and entertainment expenses for book purposes of $100,000
Pre-tax book income includes $1,500,000 in foreign income from a subsidiary that is not included in US taxable income, and is taxed at a foreign rate of 25%
Book depreciation for 2016 is $200,000 and MACRS depreciation is $320,000
GC is entitled to a Section 199 deduction of $50,000
GC increased its reserve for bad debts in 2016. The book expense for bad debts is $120,000 and the tax deduction for bad debts written off is $40,000.
The book expense for future retiree medical benefits is $50,000. GC expects to continue its practice of setting up a Valuation Allowance for any deferred tax asset related to this expense.
GC has a UNICAP adjustment for 2016 that results in an increase in inventory and a decrease in cost of sales of $75,000
In 2016, GC sold an asset and the sale qualifies for the installment sale under IRC Code Section 453. The gain reported for book purposes is $300,000. The gain recognized for tax purposes is $100,000.
GC’s state income tax rate is 5% and its US corporate income tax rate is 34%.
Please prepare the following schedules:
A) The current tax provision
B) the deferred tax provision
C) the 12/31/2016 tax balance sheet accounts
D) a rate reconciliation