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I

Identify the book-tax differences that are apparent from the Extra trial balance.Classify them as temporary or permanent.Assume that Extra has adopted ASU 2015-17, Balance Sheet Classification of Deferred Taxes that requires the classification of all deferred tax assets and liabilities as noncurrent.Use a format like the worksheet below for this purpose.A few sample entries have been included in the template. (See the spreadsheet accompanying this problem)

II

Use the trial balance data to construct Extra?s tax expense (?tax provision?) for the year.First determine the current tax payable amounts, state and federal, that will be reported on the year?s tax returns.Then add the deferred tax items to compute the total income tax provision.

Extra?s statutory tax rates are 35 percent federal, and 5 percent blended state (before related federal effects).Federal income taxes are not deductible in any of the states in which Extra operates, but state income taxes are a proper federal tax deduction.All of the states with which Extra files income tax returns define taxable income in the same way.

You might structure your computation as illustrated below.Make certain that your classifications of the book-tax differences match those that you developed in Part I.

III

Construct the journal entry to record Extra?s current and deferred tax expense for the year

PwC Case Studies in Taxation, 2013, PwC, LLP EXTRA CORPORATION Extra Corporation was formed in 1995. It is based in Kentucky and operates throughout the US southeast. Extra is owned by the Xavier family, one-third each by sister Carol (age 55), sister Joan (age 53), and brother Buddy (age 49). The company controls over $800 million in productive assets, most of which are located in Kentucky. Extra started out as a provider of materials to the manufacturers of PDAs like the Palm Pilot, and now it performs the same functions for various cell phone manufacturers like Samsung. The industry is concentrated among about a half-dozen competitors, most of which are located outside of the US. Extra has used its favorable location and low wage structure to remain profitable in most years, but it fears that the environmental problems created by its production processes will attract incremental local and US federal taxes, fines, and penalties in the next few years. Accordingly, the entity projects that it will show net book and tax losses for the next two to four years, after which regular profitability will return. Extra uses GAAP for its financial statements; although it is not yet publicly traded, the entity's lenders keep a close watch on annual book income/loss. The corporation employs a tax department of thirtyseven professionals, and an internal audit function includes twenty-five permanent positions. Extra uses your firm for its outside tax work, most of which is multijurisdictional tax planning, including the income tax return that it files with the federal government, seven states, and two cities. Extra generates no foreign-source income or deductions at this point. The entity is not subject to the alternative minimum tax this year. No tax rate changes have been enacted that will apply in future years. Extra does not record a valuation allowance to its tax deferrals. Extra holds only one carryforward to this tax year, a state and federal NOL of $120 million. The book expenses that are added to the unicap balance this year totaled $300 million (Under the unicap rules of IRC section 263A, certain costs that are generally expensed for book purposes are instead added to inventory cost for tax purposes, i.e. not deducted until recovered through cost of goods sold). Extra also claims a deduction for the domestic manufacturing deduction under section 199 in the amount of $19 million. Your present task is to convert the trial balance numbers into a worksheet that calculates both the current state and federal tax payable, and the total tax provision for Extra this year. The book trial balance has been prepared and is presented in summary form with annotations below. Page 1 of 5 PwC Case Studies in Taxation, 2013, PwC, LLP EXTRA CORPORATION Extra Corporation Trial Balance Data, Condensed ($M) With annotations Notes re tax amounts ($M) Page 2 of 5 PwC Case Studies in Taxation, 2013, PwC, LLP EXTRA CORPORATION I Identify the book-tax differences that are apparent from the Extra trial balance. Classify them as temporary or permanent. Assume that Extra has adopted ASU 2015-17, Balance Sheet Classification of Deferred Taxes that requires the classification of all deferred tax assets and liabilities as noncurrent. Use a format like the worksheet below for this purpose. A few sample entries have been included in the template. (See the spreadsheet accompanying this problem) Extra Corporation Book-Tax Difference Summary Item Advertising Costs Depreciation Fines, Penalties, Lobbying Expenditures Bad Debts No BookTax Difference Book-Tax Differences Permanen Temporary t Non-Current II Page 3 of 5 PwC Case Studies in Taxation, 2013, PwC, LLP EXTRA CORPORATION Use the trial balance data to construct Extra's tax expense (\"tax provision\") for the year. First determine the current tax payable amounts, state and federal, that will be reported on the year's tax returns. Then add the deferred tax items to compute the total income tax provision. Extra's statutory tax rates are 35 percent federal, and 5 percent blended state (before related federal effects). Federal income taxes are not deductible in any of the states in which Extra operates, but state income taxes are a proper federal tax deduction. All of the states with which Extra files income tax returns define taxable income in the same way. You might structure your computation as illustrated below. Make certain that your classifications of the book-tax differences match those that you developed in Part I. III Construct the journal entry to record Extra's current and deferred tax expense for the year. Page 4 of 5 PwC Case Studies in Taxation, 2013, PwC, LLP EXTRA CORPORATION Extra Corporation Trial Balance to Tax Provision ($M) Item Pre-Tax Book Profits Temporary Book-Tax Differences Permanent Book-Tax Differences 505 Book-Tax Adjustments, Current Tax Payable State Taxable Income State Tax Payable Federal Taxable Income Federal Tax Payable Current Tax Payable, Total Deferred Tax Expense Total Temporary Differences Times Combined State and Federal Tax Rate (A) State (deductible for federal) .05 - (.35) (.05) = 3.25% plus Federal 35% Addition to Net Deferred Tax Asset (rounded) Tax Provision X .3825 (B) Current + Deferred (A + B) Page 5 of 5