You have been assigned to compute the income tax provision for the company. The companys income statement for 2020 is as follows: You have identified
You have been assigned to compute the income tax provision for the company. The companys income statement for 2020 is as follows:
You have identified the following permanent differences:
Interest from municipal bonds $70,000
Nondeductible Meals and Entertainment Expenses 30,000
Dividend Received Deduction 140,000
a. Why is the effective tax rate different from the statutory tax rate of 21%? Does this reflect good tax planning on their part? What is the cost of achieving this effective tax rate?
b. Assume the tax rate for the current year increased to 28%. Recompute their deferred income tax expense or benefit for 2020 using the template on the following page.
c. The company's tax director believes the firm may actually be able to deduct the Meals and Entertainment Expense of $30,000 because the firms manufacturing facility is far from any available restaurants. However, he is not confident that it is more likely than not the position would be sustained under audit. Assume the firm decides to tax this deduction on its tax return. Re-do the full journal entry for the tax position assuming the firm plans to take the deduction on its tax return. (Assume rate remains at 21%).
Income Statement Year ended 12/31/2020 Net Sales $25,000,000 Cost of Sales 15,500,000 Gross Profit 9,500,000 Other Income: Dividends 200,000 Interest 50,000 Total Other Income 250,000 Gross Income 9,750,000 Expenses: Compensation 2,800,000 Depreciation 1,400,000 Charitable Donations 400,000 Meals and Entertainment 80,000 Other Expenses 3,000,000 Total Expenses 7,680,000 Income Before Income Taxes 2,070,000 Taxable Temp Differences Temporary Difference Scheduling Template BOY Beginning Current Year Cumulative Deferred Change Cumulative T/D Taxes @ 21% T.D. Ending Deferred Taxes @21% (3,000,000) (630,000) (500,000) (3,500,000) (735,000 BOY Cumulative T/D Beginning Deferred Taxes @ 21% Current Year Change EOY Cumulative T.D. Ending Deferred Taxes @21% 100,000 21,000 30,000 130,000 27,300 Non-Current Accumulated Depreciation Deductible Temporary Differences Current Allowance for Bad Debts Accrued Warranties Total Current Non-current Charitable Contributions Deferred Compensation Total Non- Current 150,000 31,500 50,000 200,000 42,000 250,000 52,500 80,000 330,000 69,300 300,000 63,000 80,000 380,000 79,800 500,000 105,000 (100,000) 400,000 84,000 800,000 168,000 (20,000) 780,000 163,800 Taxable Temp Differences Temporary Difference Scheduling Template BOY Beginning Current Year EOY Cumulative Deferred Change Cumulative T/D Taxes @ 21% T.D. Ending Deferred Taxes @28% (3,000,000) (630,000) (500,000) (3,500,000) BOY Cumulative T/D Beginning Deferred Taxes @ 21% Current Year Change EOY Cumulative T.D. Ending Deferred Taxes @28% 100,000 21,000 30,000 130,000 Non-Current Accumulated Depreciation Deductible Temporary Differences Current Allowance for Bad Debts Accrued Warranties Total Current Non-current Charitable Contributions Deferred Compensation Total Non- Current 150,000 31,500 50,000 200,000 250,000 52,500 80,000 330,000 300,000 63,000 80,000 380,000 500,000 105,000 (100,000) 400,000 800,000 168,000 (20,000) 780,000 Income Statement Year ended 12/31/2020 Net Sales $25,000,000 Cost of Sales 15,500,000 Gross Profit 9,500,000 Other Income: Dividends 200,000 Interest 50,000 Total Other Income 250,000 Gross Income 9,750,000 Expenses: Compensation 2,800,000 Depreciation 1,400,000 Charitable Donations 400,000 Meals and Entertainment 80,000 Other Expenses 3,000,000 Total Expenses 7,680,000 Income Before Income Taxes 2,070,000 Taxable Temp Differences Temporary Difference Scheduling Template BOY Beginning Current Year Cumulative Deferred Change Cumulative T/D Taxes @ 21% T.D. Ending Deferred Taxes @21% (3,000,000) (630,000) (500,000) (3,500,000) (735,000 BOY Cumulative T/D Beginning Deferred Taxes @ 21% Current Year Change EOY Cumulative T.D. Ending Deferred Taxes @21% 100,000 21,000 30,000 130,000 27,300 Non-Current Accumulated Depreciation Deductible Temporary Differences Current Allowance for Bad Debts Accrued Warranties Total Current Non-current Charitable Contributions Deferred Compensation Total Non- Current 150,000 31,500 50,000 200,000 42,000 250,000 52,500 80,000 330,000 69,300 300,000 63,000 80,000 380,000 79,800 500,000 105,000 (100,000) 400,000 84,000 800,000 168,000 (20,000) 780,000 163,800 Taxable Temp Differences Temporary Difference Scheduling Template BOY Beginning Current Year EOY Cumulative Deferred Change Cumulative T/D Taxes @ 21% T.D. Ending Deferred Taxes @28% (3,000,000) (630,000) (500,000) (3,500,000) BOY Cumulative T/D Beginning Deferred Taxes @ 21% Current Year Change EOY Cumulative T.D. Ending Deferred Taxes @28% 100,000 21,000 30,000 130,000 Non-Current Accumulated Depreciation Deductible Temporary Differences Current Allowance for Bad Debts Accrued Warranties Total Current Non-current Charitable Contributions Deferred Compensation Total Non- Current 150,000 31,500 50,000 200,000 250,000 52,500 80,000 330,000 300,000 63,000 80,000 380,000 500,000 105,000 (100,000) 400,000 800,000 168,000 (20,000) 780,000
