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

Item Sales COGS Gross Profit Other Income: Expenses: Other Loss: Subtotal: Tax Special Deductions: Subtotal Subtotal Book Income before tax: Taxable Income: Tax Liability: Total Tax Expense/Benefit Net Income per books Book Income Taxable Income Difference Perm/T emp Item Beginning of Beginning Tax Rate Year Current Year Balance Used Last Cumulative Change Per DTA/(DTL) Year Differences Tax Return Net Change in DTA/DTL Journal Entry (put your debits and credits here) End of Year Cumulative Differences End of Year Deferreds (apply tax rate) Change in DTA/DTL (for Journal Entry) Reconciliation of Income (Loss) and Analysis of Unappropriated Retained Earnings per Books SCHEDULES M-1 and M-2 (Form 1120-F) Department of the Treasury Internal Revenue Service Name of corporation Schedule M-1 1 2 3 4 OMB No. 1545-0123 2016 Information about Schedules M-1 and M-2 (Form 1120-F) and its instructions is at www.irs.gov/form1120f. Attach to Form 1120-F. Employer identification number Reconciliation of Income (Loss) per Books With Income per Return Note. The corporation may be required to file Schedule M-3 (see instructions). Net income (loss) per books . . . . . Federal income tax per books . . . . Excess of capital losses over capital gains Income subject to tax not recorded on books this year (itemize): 7 Income recorded on books this year not included on this return (itemize): a Tax-exempt interest $ b Other (itemize): 6,817,850 13,816,400 209,000 8 Deductions on this return not charged against book income this year (itemize): a Depreciation . . $ 85,000 b Charitable contributions $ 3,500,000 c Other (itemize): 5 Expenses recorded on books this year not deducted on this return (itemize): $ a Depreciation . . . . 85,000 b Charitable contributions $ 3,500,000 c Travel and entertainment $ 14,000 d Other (itemize): 6 Add lines 1 through 5 . Schedule M-2 1 2 3 4 . . . . . . 24,442,250 9 10 Add lines 7 and 8 . . . . Incomeline 6 less line 9 . . . . . . . . . . . . . 6 a Cash . . b Stock . . c Property . Other decreases (itemize): 7 8 Add lines 5 and 6 . . . . . . . Balance at end of year (line 4 less line 7) . 3,585.000 20,857,250 Analysis of Unappropriated Retained Earnings per Books Balance at beginning of year Net income (loss) per books . Other increases (itemize): Add lines 1, 2, and 3 . . . . . . Who Must File Generally, any foreign corporation that is required to complete Form 1120-F, Section II must complete Schedules M-1 and M-2 (Form 1120-F). However, the following rules apply. Do not complete Schedules M-1, M-2, and M-3 if total assets at the end of the tax year (Schedule L, line 17, column (d)) are less than $25,000. Complete Schedule M-3 in lieu of Schedule M-1 if total assets at the end of the tax year that are reportable on Schedule L are $10 million or more. A corporation filing Form 1120-F that is not required to file Schedule M-3 may voluntarily file Schedule M-3 instead of Schedule M-1. See the Instructions for Schedule M-3 (Form 1120-F) for more information. Foreign corporations that (a) are required to file a Schedule M-3 (Form 1120-F) and have less than $50 million in total assets at the end of the tax year or (b) are not required to file a Schedule M-3 (Form 1120-F) and voluntarily file a Schedule M-3 (Form 1120-F) must either (1) complete Schedule M-3 (Form 1120-F) entirely or (2) complete Schedule M-3 (Form 1120-F) through Part I and . . . . . . . . . 5 Distributions: complete Schedule M-1 instead of completing Parts II and III of Schedule M-3 (Form 1120-F). If the foreign corporation chooses (2), then Schedule M-1, line 1 must equal Schedule M-3 (Form 1120-F), Part I, line 11. See the Instructions for Schedule M-3 (Form 1120-F) for more information. Note. If Schedule M-3 is completed in lieu of Schedule M-1, the corporation is still required to complete Schedule M-2. Specific Instructions Schedule M-1 Line 1. Net income (loss) per books. The foreign corporation must report on line 1 of Schedule M-1 the net income (loss) per the set or sets of books taken into account on Schedule L. Line 5c. Travel and entertainment expenses. Include any of the following: Meal and entertainment expenses not deductible under section 274(n). Expenses for the use of an entertainment facility. The part of business gifts over $25. Expenses of an individual over $2,000 that are allocable to conventions on cruise ships. For Paperwork Reduction Act Notice, see the Instructions for Form 1120-F. Cat. No. 49678K Employee achievement awards over $400. The cost of entertainment tickets over face value (also subject to the 50% limit under section 274(n)). The cost of skyboxes over the face value of nonluxury box seat tickets. The part of luxury water travel expenses not deductible under section 274(m). Expenses for travel as a form of education. Other nondeductible travel and entertainment expenses. Line 7a. Tax-exempt interest. Report any tax-exempt interest received or accrued, including any exempt-interest dividends received as a shareholder in a mutual fund or other regulated investment company. Also report this same amount in item P at the top of page 2 of Form 1120-F. Schedule M-2 Line 1. Beginning balance of unappropriated retained earnings. Enter the beginning balance of unappropriated retained earnings per the set(s) of books taken into account on Schedule L. Note. For additional information for Schedule M-2 reporting, see the Instructions for Schedule M-3 (Form 1120-F). Schedules M-1 and M-2 (Form 1120-F) 2016