Tax Provision Assignment This practice assignment is designed to help you integrate your understanding of the accounting
Question:
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Tax Provision Assignment
This practice assignment is designed to help you integrate your understanding of the accounting measure of income with the tax measure of income.The CPA exam is increasingly requiring candidates to integrate knowledge from different areas of accounting.One of the key areas for integration is the reconciliation of book income to taxable income.
Required (Round everything to whole numbers)Show Calculations:
1.Prepare in good form a schedule that calculates ABC's net income per books (after taxes) for 2016.
2.Prepare in good form a separate schedule or a column within the schedule from #1 that calculates ABC'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.Prepare a roll-forward of all deferred tax assets and liabilities. Show the beginning asset/liability, the beginning cumulative difference, the change from this year, the ending cumulative difference, the ending asset/liability and the change.
5.Prepare the book journal entry/entries to record tax expense including current and deferred tax expense or benefit.
6.Reconcile net income per books to taxable income before the dividends received deduction (but after USPAD and CCD) by preparing a Schedule M-1 (which is on page 5 of the Form 1120 and can be found in your course-pack or at www.IRS.gov). Show the details behind any summations used on this form (i.e. tell me what line items add up to your numbers).
Reconciliation of Book to Taxable Income
The books of ABC Corporation, a domestic manufacturer, showed the following for 2016:
Gross Sales$ 124,560,000
Cost of goods sold 97,535,000
Short term capital loss on sale of Lowe's stock3,000
Meals and entertainment costs14,000
Salaries and other operating expenses840,000
Cash contributions to qualified public charities3,500,000
Depreciation expense for tax (for books=85,000)220,000
Dividend income on DEF Corp. stock?16% ownership245,000
Prepaid interest expense on outstanding debt:
(paid on 10/1/16, $40,000 per month) 240,000
Long?term capital gain on sale of Oracle stock 222,000
Prepaid advertising expense (paid on 11/1/16, $9,000 per month)27,000
Bad debt expense for book purposes:
($26,000 in bad debts were actually written off this year)16,000
Life insurance premiums on the CEO (ABC is the beneficiary)5,000
Interest on loan to purchase California School District Bonds18,000
Long-term capital loss on sale of Fake Company stock255,000
Additional Information:
1.ABC operates on a calendar year and keeps its books in accordance with GAAP. ABC is an accrual-basis taxpayer.
2.ABC's QPAI for the year was $12,000,000. Its W-2 wages from USPAD eligible activities are $3,000,000.
3.Assume ABC expects to remain in the same tax bracket for the next several years and does not expect any changes in corporate tax rates. ABC's marginal tax rate in 2015 was 35%. No valuation allowance is necessary for any deferred tax assets.
4.ABC's beginning of year deferred tax assets and liabilities are as follows. Any other deferred tax assets and/or liabilities not listed below have a beginning balance of zero, meaning the company did not have a previous balance for them.
Depreciation
$580,000
DTL
Bad Debt
$1,200
DTA
Prepaid Advertising
$12,500
DTL
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