Reconciliation of Book to Taxable Income

The books of Mullins Corporation, a domestic manufacturer, showed the following for $2023$:

Gross Sales $ $15,520,000$

Cost of goods sold $11,930,000$

Short term capital loss on sale of Lowe$$s stock $48,500$

Meals and entertainment costs $($Assume $50\%$ business meals, $50\%$ entertainment amounts$)36,200$

Salaries and other clearly deductible expenses $2,615,000$

Fine paid for violation of EPA environmental standards $15,000$

Prepaid Insurance Expense $(1-$Year Policy Purchased $5/1/2023)24,000$

Interest income on California School District Bonds $63,000$

Contribution of LT capital gain stock to qualified public charities $($A$/$B $110,000,$ FMV $125,000)$

Depreciation expense for tax $($for books$=96,000)210,000$

Dividend income on DEF Corp. stock$70\%$ ownership $160,000$

Prepaid interest expense on outstanding debt $($paid on $11/1/23,$ $$20,000$ per month$)200,000$

Long$-$term capital gain on sale of Oracle stock $31,600$

Prepaid rental income $($received on $9/30/23,$ $$4,000$ per month$)48,000$

Bad debt expense for book purposes $($actual debts directly written off this year $-$ $$45,000)65,000$

Additional Information:

$1.$ Mullins Corp. operates on a calendar year and keeps its books in accordance with GAAP. To the

extent allowable by tax law, Mullins Corp. is also an accrual$-$basis taxpayer.

$2.$ Mullins Corp. did not begin the tax year with any tax carryovers. In addition, Mullins Corp. did not

have any balance in its deferred tax liability account at the beginning of $2023.$

$4.$ Mullins Corp. did not recognize any capital gains during the last three years but expects to have a

capital gain in $2024$ of over $$100,000.$ Assume that any excess charitable contribution deduction is a

permanent difference $($it will not be absorbed$/$used in the next $5$ years$).$

$5.$ Finally, assume Mullins Corp. does not expect any changes in corporate tax rates. For all

DTA$$s$/$DTL$$s$,$ use a flat rate of $21\%.$

Required:

$1.$ Prepare in good form a schedule that calculates Mullins Corp$$s net income per books $($after taxes$)$ for

$2023.$

$2.$ Prepare in good form a separate schedule or a column within the schedule from #$1$ that calculates

Mullins Corp$$s taxable income and tax liability.

$3.$ Identify and categorize differences between pre$-$tax book income and taxable income as permanent or

temporary differences.

$4.$ For all temporary differences, calculate the deferred tax asset or deferred tax liability.

$5.$ Prepare the book journal entry$/$entries to record tax expense including current and deferred tax

expense.

$6.$ Prepare Page $1$ of the $1120$ tax return through Line $31($Taxable Income and Tax$).$ It is NOT

necessary to complete any supplemental statements $($Schedule D for Capital Gains, for example$).$ Just

show the correct amount on the appropriate line of the form.

$7.$ Reconcile net income per books to taxable income before the dividends received deduction by

preparing a Schedule M$-1($can be found on CANVAS $$ you do not necessarily have to print off and

use the actual form $$ if you prefer, can just type or write the line items from the form and complete

by hand$).$ Show the details behind any summations used on this form $($i$.$e$.$ tell me what line items add

up to your number$).$ Note: In most cases, Mullins Corp. would have to file some sort of Schedule M$-$

$3($at least Section I$)$ due to the size of the company $($Probably has assets at least $10$mm$).$ However,

just assume that an M$-1$ will suffice in this case study.