Part $1$: $(25$ points$)$

Required: For each issue determine the journal entries required to the Company$$s preliminary $2023$ financial statements to comply with ASC $740-10.$ Provide support $($calculations and written explanation$)$ for your conclusion.

Highland Co$.($the $$Company$),$ an SEC registrant, is a manufacturer of gym equipment. The Company has been in business for more than $40$ years, operating profitably for the past $30.$ In addition, it has an applicable effective tax rate of $21$ percent and no unused tax loss or credit carryforwards. The Company$$s fiscal year ends on December $31.$ In prior years, the Company determined it had no uncertain tax positions that required recognition under ASC $740.$ The Company is preparing its financial statements for the year ended December $31,2023.$ In determining the amount of its $2023$ tax provision, the Company has prepared a draft of its $2023$ tax return.

The Company$$s tax working papers indicate that its preliminary tax balances, on an $$as filed$$ basis $($i$.$e$.,$ before ASC $740-10$ adjustments$),$ are as follows:

Balance sheet accounts:

Current tax liability $$2,500[1]$ Deferred tax liability $ $1,050[2]$

Income statement accounts:

Current tax expense $$2,500[3]$ Deferred tax expense $ $275[4]$

$[1]$ Agrees to $$tax$-$owed$$ line item in draft tax return.

$[2]$ Relates to fixed asset temporary differences only $($book basis of $$115,000$ and tax basis of

$$110,000).$

$[3]$ Agrees to tax provision rollforward.

$4]$ Agrees to deferred tax provision working papers.

Management has identified two deductions, taken in its draft $2023$ tax return, for which the tax law is not clear as to whether those tax positions should reduce the Company$$s $2023$ tax liability. The Company is evaluating these tax positions under ASC $740$ for financial reporting purposes. Management is highly confident that all other tax positions will be sustained by the taxing authority upon examination $($recognition$)$ and that $100$ percent of the deductions claimed in the tax return should be reflected in the financial statements $($measurement$)$ because they are based on clear and unambiguous tax law.

Issue $1$ Facts: As a result of implementing a certain tax strategy, the Company has included a $$300$ deduction $($representing a permanent book$-$tax difference$)$ in its draft tax return, resulting in a $$63$ reduction to taxes payable. There is uncertainty over whether the tax strategy is sustainable under the tax law and therefore over whether the additional $$300$ is deductible for tax purposes.

Management asserts that there is a $45$ percent chance that the tax position would be sustained. However, on the basis of its past experience in negotiating settlements with the taxing authority, management believes that if it were to negotiate a settlement with the taxing authority rather than take the dispute to the court of last resort, it would have an $80$ percent cumulative probability of realizing at least $$10\mathrm{.}50$ of benefit, $($i$.$e$.,$ the Company believes it has a $10$ percent chance of realizing $$63($$$300\backslash$times $21\%),$ a $40$ percent chance of realizing $$21($$$100\backslash$times $21\%),$ a $30$ percent chance of realizing $$10\mathrm{.}50($$$50\backslash$times $21\%),$ and only a $20$ percent chance of realizing no benefit$).$

Issue $2$ Facts: The Company has taken a tax deduction $($representing a permanent book$-$tax difference$)$ in its draft tax return in the amount of $$150,$ resulting in a $$31\mathrm{.}50$ reduction to taxes payable. Management has obtained a tax opinion from a law firm at a $65$ percent level of confidence that the tax position is appropriately deductible under the tax law and concluded that the tax position meets the more$-$likely$-$than$-$not recognition threshold. Management asserts that it would negotiate a settlement with the taxing authority in the event of a dispute. In the event of a negotiated settlement with the taxing authority, management asserts there is a $35$ percent probability that it would sustain the full $$31\mathrm{.}50($$$150\backslash$times $21\%)$ tax benefit, a $35$ percent probability that it would sustain $$21($$$100\backslash$times $21\%)$ of the tax benefit, and a $30$ percent probability that it would sustain $$12\mathrm{.}60($$$60\backslash$times $21\%)$ of the tax benefit.

For both Issue $1$ and Issue $2$ assume a $4\%$ annual interest rate from the due date of the tax and underpayment penalties of an equal amount and the company chooses to charge to UTP rather than interest expense. For each issue determine the journal entries required to the Company$$s preliminary $2023$ financial statements to comply with ASC $740-10.$ Provide support $($calculations and written explanation$)$ for your conclusion.