Nebula Auto Inc.

Alex Wallace, the tax director at Nebula Auto Inc. (Nebula), has engaged your accounting firm to prepare the tax-related journal entries and offer consulting services related to its valuation allowance account for the year ended 12/31/2019. Nebula was founded in 2017 as publicly-traded SEC registrant and its primary line of business is the manufacturing of affordable electric automobiles. The company has grown steadily during its initial years but is yet to report positive net income or taxable income in any prior year. During the past year (2019), the drastic fall in gasoline prices has put a lot of pressure on the company. Sales were down roughly 30% in 2019 due to decreased consumer demand for electric vehicles. In 2019 the firm posted a large loss with GAAP-based pre-tax income equal to negative $225,290,000. However, the CFO, CEO and tax director have suggested that they believe they will potentially be able to have positive book and taxable income in 2025 because they believe demand for electric cars will pick up soon.

See below for financial highlights of the company over the past 3 years:

Schedule 1 Nebula Auto, Inc. - Selected Financial Highlights

Consolidated Statements of Income Years Ended December 31, ($ ,000)	2017	2018	2019
Revenues	$4,259,626	$4,725,027	$3,322,797
Cost of sales	3,407,151	3,747,189	2,997,507
Gross profit	852,475	977,838	325,290
Other expenses, including depreciation, personnel and pension expense	1,034,283	1,094,980	750,280
Pre-tax income (loss)	(181,808)	(117,142)	(225,290)
Tax expense (benefit)	0	0	?
Net income (loss)	$(181,808)	$(117,142)	$?
	==========	==========	==========

Here are some additional facts that you should take into consideration in the preparation of Nebulas tax provision:

1. Nebula is organized as a C-corporation for tax purposes and files a Form 1120. Assume the corporate tax rate is a flat 21% in 2018 and all years going forward.

2. Nebula invested in several municipal bonds (tax-exempt) during 2019. Total income from these bonds was $5,456,000.

3. Nebula paid a fine for dumping waste into a local river of $10,000,000 in 2019.

4. The following is the asset/depreciation schedule for all depreciable assets as of 12/31/2019:

	BOOK/GAAP		TAX
	Cost	Acc Depr	Cost	Acc Depr
DEPRECIABLE ASSETS
1/1/2019 Beg Balance	315,000,000	200,048,156	315,000,000	256,195,000
Net Purchases during fiscal year	45,000,000		45,000,000
Disposals during fiscal year	3,000,000	800,000	3,000,000	700,000
2019 depreciation		3,769,860		4,756,890
12/31/2019 End Balance	357,000,000	203,018,016	357,000,000	260,251,890

5. The remaining differences between GAAP based income/expenses and tax income/expenses are as follows:

COGS: GAAP: $2,496,150, Tax: $1,989,658

Unrealized holding loss (trading debt investment): GAAP: $4,830,150, Tax: ?

Warranty Expense: GAAP: $8,989,360, Tax: $6,502,856

6. Nebula had beginning balances in their DTA and DTL accounts of $22,779,942 and $11,790,837 respectively related to prior temporary differences. These balances were already adjusted for the rate reduction in 2017 from 35% to 21% and are all correctly valued at 21%.

7. Please assume that the beginning DTL balance is all related to the temporary difference related to depreciation. The beginning DTL is computed as beginning book acc. Depr. From above of 200,048,156 less beginning tax acc. Depr. Of 256,195,000 multiplied by the tax rate of 21% (i.e., 200,048,156-256,195,000)*.21 = 11,790,837

8. Please assume the beginning balance in the DTA account was all due to prior year NOL carryforwards. Thus, there are no prior DTA balances reversing in the current year or that are needed to be accounted for. Nebula also has previously recorded a full valuation allowance for this DTA equal to $22,779,942.

Instructions

Your assignment is to start with the GAAP statements and make the necessary tax adjusting entries to the books of Nebula to allow you to compute federal taxable income (loss), tax expense (benefit) and net income (loss). Additionally, part of your engagement is to provide a memo where you make a recommendation regarding whether or not Nebula should record a valuation allowance against the deferred tax asset created by the current year net operating loss (NOL) and any other DTAs that were created during the year.

The following are your deliverables for the assignment:

1. Prepare a schedule in Excel (in good form using the template on Canvas) that includes the following:
   1. Reconciliation of pre-tax book income (loss) to taxable income (loss).
   2. Calculation of deferred tax balances as of December 31, 2019 (please show account balances, not amounts for balance sheet presentation)
   3. All tax-related journal entries that Nebula must record for the year ended December 31, 2019.
   4. Disclosure of pretax book income, current and deferred tax expense and net income per the US GAAP financial statements