"Problem C: 3-65:

Permtemp Corporation formed in 2008 and, for that year, reported the following book income statement and balance sheet, excluding the federal income tax expense, deferred tax assets, and deferred tax liabilities:

Sales $20,000,000

Cost of goods sold) (15,000,000)

Gross profit $ 5,000,000

Dividend income 50,000

Tax-exempt interest income 15,000

Total income $ 5,065,000

Expenses:

Depreciation $ 800,000

Bad debts 400,000

Charitable contributions 100,000

Interest 475,000

Meals and entertainment 45,000

Other 3,855,000

Total expenses) 5,675,000

Net loss before federal income taxes $ (610,000)

Cash $ 500,000

Accounts receivable $ 2,000,000

Allowance for doubtful accounts) (250,000) 1,750,000

Inventory 4,000,000

Fixed assets $10,000,000

Accumulated depreciation) (800,000) 9,200,000

Investment in corporate stock 1,000,000

Investment in tax-exempt bonds 50,000

Total assets $16,500,000

Accounts payable $2,610,000

Long-term debt 8,500,000

Common stock 6,000,000

Retained earnings) (610,000)

Total liabilities and equity $16,500,000

Additional information for 2008:

The investment in corporate stock is comprised of less-than-20%-owned corporations.

Depreciation for tax purposes is $1.4 million under MACRS.

Bad debt expense for tax purposes is $150,000 under the direct writeoff method.

Limitations to charitable contribution deductions and meals and entertainment expenses must be tested and applied if necessary.

Qualified production activities income is zero.

Required for 2008:

a. Prepare page 1 of the 2008 Form 1120, computing the corporations NOL.

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 under ASC 740. Use the balance sheet information to prepare Schedule L of the 2008 Form 1120.

c. Prepare the 2008 Schedule M-3 for Form 1120.

d. Prepare a schedule that reconciles the corporations effective tax rate to the statutory 34% tax rate.

Note: For 2008 forms, go to forms and publications, previous years, at the IRS website, www.irs.gov.

For 2009, Permtemp 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

$20,425,000

Additional information for 2009:

Depreciation for tax purposes is $2.45 million under MACRS.

Bad debt expense for tax purposes is $425,000 under the direct writeoff method.

Qualified production activities income is $3 million.

Required for 2009:

a. Prepare page 1 of the 2009 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. Use the balance sheet information to prepare Schedule L of the 2009 Form 1120.

c. Prepare the 2009 Schedule M-3 for Form 1120.

d. Prepare a schedule that reconciles the corporations effective tax rate to the statutory 34% tax rate.