- Compute Bugs Federal Income Tax for the year ended December 31, 2019. Please show your calculation. (the following question templates are probably slightly off and the correct answers/work to this problem may include updating the actual line items)
- Compute Bugss Business Interest Deduction. Please show your calculation.
- Compute Bugss Earnings and Profits for the year ended December 31, 2019. Please show your calculation.
Taxation of Business Entities, by Spilker et al. Chapters 1-8 1. General knowledge of income inclusion, deductible expenses, accounting periods and methods 2. Ability to compute gains and losses including computation of amount realized, effect of debt and ability to compute basis. 3. Definition of capital and 1231 gains and losses 4. Effect of capital gains and losses both long term and short term 5. Effect of 1231 gains and losses 6. Definition of charitable contributions 7. MACRS depreciation 8. 1245 recapture 9. Effect and operation of the passive loss rules 10. Self-employment tax Bug Corporation (Bug) is manufacturer of heavy equipment used throughout the world. It is a widely held C Corporation. For the year ended December 31, 2019, the results of operations are as follows: $ Sales and Revenues Sales of Machinery: Revenue for Financial Operations Total Revenues 50,755,000,000(1)(2) 3,045,000,000 53,800,000,000 Operating Costs Cost of Goods Sold Sales, General and Administrative Research and Development Interest Expense on Financial Products Other Operating Expenses Total Operating Costs 36,630,000,000(3)(4) 5,162,000,000 (5)6)(7)(8)(9)(10) 1,693,000,000 754,000,000 1,271,000,000 45.510,000,000 Operating Profit 8,290,000,000 Interest Expense excluding Financial Products Other Income (expense) 421,000,000(11) (57,000,000) (12)(13) Profit before Taxes Provision for Income Tax Expense 7,812,000,000 1,746,000,000 (14) 6,066,000,000 Net Income of consolidated companies Equity in affiliated nonconsolidated companies 28,000,000(15) Profit from noncontrolling interests 1,000,000(16) Net Income 6,095,000,000 1) Bug bills and receives advance payments for equipment before the equipment is delivered in certain cases. The sale is not recognized for financial statements until delivery. In 2019, the amount received for advance payments was $ 1,654,000,000. In 2018, the amount was $ 1,680,000,000. Equipment on the amounts collected in 2018 was delivered in 2019. 2) When sales are recorded, an offsetting estimated warranty contra revenue (expense) is also recorded. For 2019, the addition to the warranty reserve was $ 1,053,000,000. $ 903,000,000 was actually paid out of the reserve during the year for warrant repairs. 3) Bug used the Last-In, First-Out (LIFO) method of inventory valuation. Use of the First-In, First-Out (FIFO) would have resulted in a reduction of Cost of Sales of $ 2,086,000,000. 4) Depreciation expense included in Cost of Goods Sold was 4,670,000,000. Of this, $ 3,900,000,000 kwas for personal property. Bug used accelerated depreciation over the asset's useful life for books. Straight-line depreciation over the asset's useful life for personal property would have been $ 3,210,000,000. Straight-line depreciation over 40 years for real property would amount to $ 590,000,000. MACRS depreciation including bonus would have been $ 5,025,000,000 for the personal property and $ 605,000,000 for the real property. 5) Bug has a deferred compensation plan consisting entirely of nonqualified stock options. The options last ten years and have a three-year vesting period. For 2019, expense of $ 205,000,000 was recognized for financial statement purposes. During the year, several options were exercised. These options had an exercise price that was less than the fair market value of the stock at the date of exercise of $ 168,000,000. 6) Bug added $ 612,000,000 to its allowance for bad debts. $ 303,000,000 of receivables were written off. 7) Included in this amount is depreciation of $ 893,000,000. Depreciation was taken using accelerated method over the assets' useful life. $ 145,000,000 of the expense was for real property. MACRS depreciation of the personal property would have been $ 987,000,000. Straight-line depreciation on the personal property using actual useful life would have been $ 723,000,000. MACRS depreciation for the real property would have been $ 103,000,000. Straight-line depreciation over 40 years for the real property would have been $ 99,000,000. 8) During the year, goodwill was impaired by $ 2,394,000,000. Amortization of goodwill over 15 years would have been $ 985,000,000. 9) Bug incurred entertainment expenses of $ 123,000,000. 10) During the year Bug expended $ 66,000,000 for meals not involving entertainment. 11) This is the total business interest expense for the corporation. Interest expense on financial operations is not subject to the limitation on business interest. 12) In this account is included Bug's total business interest income of $ 202,000,000 13) Included in this account is a $ 30,000,000 gain from sale of a stock held as an investment. 14) State Income tax represented $59,000,000. Nondeductible penalties were $34,000.000. The remainder is made up of Federal Income Tax Expense. 15) These were from interests in foreign corporations. Any dividends received from these corporations receive a 100% dividends received deduction with no limitations due to changes made by the Tax Cut and Jobs Act of 2017. Bug received $ 3,200,000 in dividends from these corporations. 16) All of this income were from corporations in which Bug owned a 25%-40% interest. Dividends from these corporations were $ 168,000. Decrease to revenues. Sales Returns estimate Returns Actual Decrease to revenue Gift Card Sales-Tax Prepayments includable for tax Net adjustment to sales Sales per Tax. Sales Cost of Sales Tax Adjustment.. cost of Sales-Tax Gross Margin Credit Card Revenue Gain on Real Estate-Sec 1291 Capital Losses Loss on Joint Venture Capital Loss Carryforward Net Capital Can................ Total income from operations Operating Expenses. SG a and A Self-Insurance Reserve Amount Paid Amount added to reserve Stock option exense-Finance Statements Nonqualified Options: .............. Deferred.compensation Amount paid out......... Financial statement Expense Depreciation Personal Property-MACRS Depreciation Personal Property-book Depreciation real property tax. Depreciation real property: books Meal Expense. Nondeductible meas. Entertainment Expenses Nondeductible percentage Goodwill expense for financial statement purposes. Goodwill amortization for tax --......................................... Sales Adinistrative and General expanes. . Restructuring Impairment and store clasing. Nondeductible amounts ---- Total Operating. Expenses operating.net Income other Income Benefit Plan Income. Nontaxable Benefit Plan Income Interest Income Joint venture. Tax Joint venture-Book Loss included in capital loss. Interest Income Income after interest but before nonoperating expenses. Other Expenses Settlement charges Interest Expense Loss on Debt Extinguishment Nondeductible loss Total Non operating expenses Taxable income before Taxes Income Tax Expense Federal Income Tax Exeense Deductible Taxes. Taxable income Tax Rate Federal Income Tax Expense Business Interest Expense Limitation: Business Interest Income ---- Adjusted Taxable income Taxable income Business Interest Expense Business Interest Income Depreciation personal property cost of revenue Depreciation Real Property cost of revenue ................................ Goodwill amortization Adjusted Taxable income Rate F-................................. Limitation Taxable income FIFO adjustement Depreciation Personal Property Cost Recovery Depreciation real property cost of revenue Nondeductible meals Capital Loss Carryforward Nondeductible Entertainment Federal Income Tax Current Earning and Profits Taxation of Business Entities, by Spilker et al. Chapters 1-8 1. General knowledge of income inclusion, deductible expenses, accounting periods and methods 2. Ability to compute gains and losses including computation of amount realized, effect of debt and ability to compute basis. 3. Definition of capital and 1231 gains and losses 4. Effect of capital gains and losses both long term and short term 5. Effect of 1231 gains and losses 6. Definition of charitable contributions 7. MACRS depreciation 8. 1245 recapture 9. Effect and operation of the passive loss rules 10. Self-employment tax Bug Corporation (Bug) is manufacturer of heavy equipment used throughout the world. It is a widely held C Corporation. For the year ended December 31, 2019, the results of operations are as follows: $ Sales and Revenues Sales of Machinery: Revenue for Financial Operations Total Revenues 50,755,000,000(1)(2) 3,045,000,000 53,800,000,000 Operating Costs Cost of Goods Sold Sales, General and Administrative Research and Development Interest Expense on Financial Products Other Operating Expenses Total Operating Costs 36,630,000,000(3)(4) 5,162,000,000 (5)6)(7)(8)(9)(10) 1,693,000,000 754,000,000 1,271,000,000 45.510,000,000 Operating Profit 8,290,000,000 Interest Expense excluding Financial Products Other Income (expense) 421,000,000(11) (57,000,000) (12)(13) Profit before Taxes Provision for Income Tax Expense 7,812,000,000 1,746,000,000 (14) 6,066,000,000 Net Income of consolidated companies Equity in affiliated nonconsolidated companies 28,000,000(15) Profit from noncontrolling interests 1,000,000(16) Net Income 6,095,000,000 1) Bug bills and receives advance payments for equipment before the equipment is delivered in certain cases. The sale is not recognized for financial statements until delivery. In 2019, the amount received for advance payments was $ 1,654,000,000. In 2018, the amount was $ 1,680,000,000. Equipment on the amounts collected in 2018 was delivered in 2019. 2) When sales are recorded, an offsetting estimated warranty contra revenue (expense) is also recorded. For 2019, the addition to the warranty reserve was $ 1,053,000,000. $ 903,000,000 was actually paid out of the reserve during the year for warrant repairs. 3) Bug used the Last-In, First-Out (LIFO) method of inventory valuation. Use of the First-In, First-Out (FIFO) would have resulted in a reduction of Cost of Sales of $ 2,086,000,000. 4) Depreciation expense included in Cost of Goods Sold was 4,670,000,000. Of this, $ 3,900,000,000 kwas for personal property. Bug used accelerated depreciation over the asset's useful life for books. Straight-line depreciation over the asset's useful life for personal property would have been $ 3,210,000,000. Straight-line depreciation over 40 years for real property would amount to $ 590,000,000. MACRS depreciation including bonus would have been $ 5,025,000,000 for the personal property and $ 605,000,000 for the real property. 5) Bug has a deferred compensation plan consisting entirely of nonqualified stock options. The options last ten years and have a three-year vesting period. For 2019, expense of $ 205,000,000 was recognized for financial statement purposes. During the year, several options were exercised. These options had an exercise price that was less than the fair market value of the stock at the date of exercise of $ 168,000,000. 6) Bug added $ 612,000,000 to its allowance for bad debts. $ 303,000,000 of receivables were written off. 7) Included in this amount is depreciation of $ 893,000,000. Depreciation was taken using accelerated method over the assets' useful life. $ 145,000,000 of the expense was for real property. MACRS depreciation of the personal property would have been $ 987,000,000. Straight-line depreciation on the personal property using actual useful life would have been $ 723,000,000. MACRS depreciation for the real property would have been $ 103,000,000. Straight-line depreciation over 40 years for the real property would have been $ 99,000,000. 8) During the year, goodwill was impaired by $ 2,394,000,000. Amortization of goodwill over 15 years would have been $ 985,000,000. 9) Bug incurred entertainment expenses of $ 123,000,000. 10) During the year Bug expended $ 66,000,000 for meals not involving entertainment. 11) This is the total business interest expense for the corporation. Interest expense on financial operations is not subject to the limitation on business interest. 12) In this account is included Bug's total business interest income of $ 202,000,000 13) Included in this account is a $ 30,000,000 gain from sale of a stock held as an investment. 14) State Income tax represented $59,000,000. Nondeductible penalties were $34,000.000. The remainder is made up of Federal Income Tax Expense. 15) These were from interests in foreign corporations. Any dividends received from these corporations receive a 100% dividends received deduction with no limitations due to changes made by the Tax Cut and Jobs Act of 2017. Bug received $ 3,200,000 in dividends from these corporations. 16) All of this income were from corporations in which Bug owned a 25%-40% interest. Dividends from these corporations were $ 168,000. Decrease to revenues. Sales Returns estimate Returns Actual Decrease to revenue Gift Card Sales-Tax Prepayments includable for tax Net adjustment to sales Sales per Tax. Sales Cost of Sales Tax Adjustment.. cost of Sales-Tax Gross Margin Credit Card Revenue Gain on Real Estate-Sec 1291 Capital Losses Loss on Joint Venture Capital Loss Carryforward Net Capital Can................ Total income from operations Operating Expenses. SG a and A Self-Insurance Reserve Amount Paid Amount added to reserve Stock option exense-Finance Statements Nonqualified Options: .............. Deferred.compensation Amount paid out......... Financial statement Expense Depreciation Personal Property-MACRS Depreciation Personal Property-book Depreciation real property tax. Depreciation real property: books Meal Expense. Nondeductible meas. Entertainment Expenses Nondeductible percentage Goodwill expense for financial statement purposes. Goodwill amortization for tax --......................................... Sales Adinistrative and General expanes. . Restructuring Impairment and store clasing. Nondeductible amounts ---- Total Operating. Expenses operating.net Income other Income Benefit Plan Income. Nontaxable Benefit Plan Income Interest Income Joint venture. Tax Joint venture-Book Loss included in capital loss. Interest Income Income after interest but before nonoperating expenses. Other Expenses Settlement charges Interest Expense Loss on Debt Extinguishment Nondeductible loss Total Non operating expenses Taxable income before Taxes Income Tax Expense Federal Income Tax Exeense Deductible Taxes. Taxable income Tax Rate Federal Income Tax Expense Business Interest Expense Limitation: Business Interest Income ---- Adjusted Taxable income Taxable income Business Interest Expense Business Interest Income Depreciation personal property cost of revenue Depreciation Real Property cost of revenue ................................ Goodwill amortization Adjusted Taxable income Rate F-................................. Limitation Taxable income FIFO adjustement Depreciation Personal Property Cost Recovery Depreciation real property cost of revenue Nondeductible meals Capital Loss Carryforward Nondeductible Entertainment Federal Income Tax Current Earning and Profits
