Question
For 2017, Permatemp reported the following book income statement and balance sheet, excluding the federal income tax expense, deferred tax assets, and deferred tax liabilities:
For 2017, Permatemp 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 | |
Total liabilities and equity | $20,425,000 |
Additional information for 2017: Because of limitations, $30,000 of the meals and entertainment expenses will be disallowed for tax purposes.
Depreciation for tax purposes is $2.45 million under MACRS.
Bad debt expense for tax purposes is $425,000 under the direct write-off method.
Ignore the U.S. production activities deduction
The corporate tax rate in 2017 was 34%. At the end of 2017, Congress reduced the corporate tax rate to 21% effective for 2018.
a. Prepare page 1 of the 2017 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. Because of the enacted tax rate change, deferred assets and liabilities at the end of 2017 will need to be valued at 21%. Use the balance sheet information to prepare Schedule L of the 2017 Form 1120.
c. Prepare the 2017 Schedule M-3 for Form 1120. d. Prepare a schedule that reconciles the corporations effective tax rate to the statutory 34% tax rate. This schedule will need a line to reflect the change in the future tax rate.
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