The Bowerman Warehouse Corporation (BWC) is organized in Oregon and operates 15 retail and grocery stores in several of the western US states. BWC is owned by a small group of private equity investors. BWC follows generally accepted accounting principles (GAAP). It uses a calendar year-end for tax and book purposes. BWC's balance sheet shows the deferred tax assets and liabilities that were created in prior years.

BWC's CFO has asked for your assistance in generating information needed for the corporation's financial statements. The financial accounting records of BWC for the current year produce the summarized trial balance (see below). Other information is available from last year's tax file and supporting records. Follow all of the public company disclosure rules of ASC 740, without regard to materiality or significance.

Additional Information

• BWC's delivery truck drivers were responsible for $35,000 in speeding tickets (included in part of operating expenses on the trial balance), all of which the company paid during the current year.
• Inventories are recorded using the LIFO (last-in-first-out) method of accounting. In addition, for tax purposes some expenses must be capitalized using the UNICAP rules. In the last fiscal year, $200,000 were capitalized for tax; in the current fiscal year, UNICAP amounted to $275,000. Assume that all inventory turns over more than once per year.
• BWC holds life insurance policies on its five officers. Premiums in the current year amounted to $215,000 (included in part of operating expenses on the trial balance). No deaths occurred in the current year; thus, no life insurance proceeds were collected.
• BWC sold some of its business assets for a net gain of $195,000 as reported on the company's trial balance. Net book value of these assets was $1,160,000 at the time of the sale. For tax purposes, adjusted basis was $600,000.
• BWC used MACRS for tax depreciation. Depreciation expense for tax was calculated at $5,093,833.
• BWC contributed $1,000,000 to its defined benefit retirement plans (included in part of operating expenses on the trial balance), but due to carryovers $1,350,000 qualified for an income tax deduction in the current year.
• BWC's tax department reported $80,000 total of documented expenses for meals and entertainment (included in part of operating expenses on the trial balance). Only 50% of these are deductible for tax purposes.
• Interest income in the current year was $64,000 from corporate bonds and $18,000 from municipal bonds.
• BWC holds a $500,000 NOL carryforward, for both state and federal purposes. (BWC has elected to forego any federal NOL carryback. None of the states in which BWC holds an NOL allows a carryback at this time.)
• Of the accounts receivable $10,000 were written off in the current year.
• Statutory tax rates for BWC are 21% federal and 6% for the states (blended). Unless otherwise noted, state income tax laws piggyback onto federal income tax provisions in all states in which BWC has nexus.
• Note that the tax rate change for federal tax purposes from 34% to 21% applies for the entire 2018 fiscal year. The change from the 34% to 21% rate does affect the calculation of deferred tax assets & liabilities.
• BWC's CFO informs you that the company does not project that it will generate any additional net capital gains in the next five years. This fact jeopardizes the corporation's ability to use its $75,000 capital loss carryforward before the five-year period expires. Management agrees to creates valuation allowance in the amount of 75 percent of the carryforward amount.
• BWC's CFO is concerned that some of its current-year accelerated cost recovery will be disallowed after an IRS audit is completed. The BWC tax department has constructed the following table of the likely outcomes of the audit negotiations on this point.

   Total Cost Recovery Deduction, as Negotiated with IRS             Probability of the Parties Agreeing to This Amount

   $450,000                                                                                                                  10%

   $300,000                                                                                                                 45%

 $250,000                                                                                                                   35%

$150,000                                                                                                                   10%

 

    

The deferred tax assets and liabilities at the end of the last year (Trial Balance from 2017) were as follows:

  

 Deferred Tax Assets                                                             Beginning Book-Tax Difference                              Tax Effect(*) (State & Federal) 

  

Inventory / Unicap                                                                               $250,000                                                            $94,900

Accounts Receivable / Bad Debt Expense                                            $40,000                                                         $15,184

 Defined Benefit Plan Contributions                                                      $350,000                                                       $132,860

  

 Net Operating Loss Carryforward                                                         $500,000                                                        $189,800

 

 Capital Loss Carryforward                                                                     $75,000                                                           $28,470

  

 Total Book-Tax Difference                                                                   $1,215,000

  

   TOTAL DTA                                                                                                                                                                    $461,214

  

 Deferred Tax Liabilities                 Beginning Book-Tax Differ                                Tax Effect(*) (State & Federal) 

   

Deferred Tax Liabilities 

Accumulated Depreciation                       $2,850,000                                                                $1,081,860

  

PPE Adjusted Basis                                    $7,750,000                                                              $2,941,900

  

 Held-for Sale Securities                           $100,000                                                                    $37,960

 Total Book-Tax Difference                        $10,700,000

  

   TOTAL DTL                                                                                                                               $4,061,720

   

   (*)Recall that the blended rate for states is 6%; the federal rate at the end of last year is 34%.

Requirements:

• Using the information provided in the Trial Balance, compute net income before taxes for BWC. (4 points)
• Identify and measure BWC's book-tax differences. Classify each of the book-tax differences as temporary or permanent. (4 points)
• Determine BWC's total tax provision for the year (i.e., the "tax accrual"). (4 points)
• Compute the corporation's effective tax rate to be reported to management. Reconcile the effective tax rate with the statutory rate tax rate for the current year. (6 points)
• Summarize BWC's changes in its Deferred Tax Assets/Liabilities for the year. Make sure you show beginning and ending balances and prepare the journal entry required to record the change in the net deferred tax balance. (6 points)