Your tax senior has e-mailed you Oh Gnome You Didn't, Inc.'s GAAP-basis trial balance and financial statements for the 2018 calendar year, prepared using Microsoft Excel, and has asked you to convert Gnome's book income into taxable income within the same Excel workbook.The Excel workbook contains pre-formatted tabs you'll need to complete to properly calculate taxable income.(See Step 1)

Your tax senior has also asked you to prepare Form 1120, Schedule M-3 for Gnome once have finished computing taxable income.(See Step 2)

Directions

Step 1 - Taxable Income Calculation using Microsoft Excel

1. Open the file titled "Tax Compliance and Provision Project - Parts I and II.xlsx".
2. The Financial Statements and Trial Balance can be found in the last 2 worksheets of the Excel workbook.
3. On the "Trial Balance" tab, make sure each of the accuracy checks calculated in red throughout the worksheet shows a result of zero.
4. You willONLYbe working with thePINKtabs for Part I of this project.
5. Click on the worksheet titled "Perm Book-Tax Differences".
6. For each type of permanent difference, select the appropriate answer in the drop-down boxes within each of the cells shaded inGREEN(16 in total).
7. Hint- you will need to use the "Trial Balance" tab to help you determine the correct "Acct. Number" for the applicable cells.
8. Click on the worksheet titled "Temp Book-Tax Differences".
9. Select the appropriate answer in the drop-down boxes within each of the cells shaded inGREEN(31 in total).
10. Hint- you will need to use the "Trial Balance" tab to help you determine the correct "Acct. Number" for the applicable cells.
11. There are alsoYELLOW cells(3 in total)that requiremanualnumerical inputs. Enter 0 if applicable.
12. Once you've fully completed the Perm and Temp Book-Tax Differences tabs, select the "Book-to-tax Rec" worksheet.
13. The accuracy checkpoint should show a variance within +/- 1.0 (cell C30).
14. Save the completed Excel workbook (only the PINK tabs should be completed) and upload to Canvas

Step 2 - Preparation of Schedule M-3 (Form 1120)

There are two options for completing step 2. Select one option to complete.

Option 1

1. Print the file titled "Schedule M-3 - partially completed.pdf".
2. Complete Parts II and III of Schedule M-3 by hand:
3. Locate the rows with book-tax differences and input the book-tax adjustment you calculated in Step 1, making sure you properly input the adjustment in the Temporary or Permanent columns on the Schedule M-3.
4. Compute the resulting taxable income/deduction and input your answer in column (d) of the applicable row.
5. Hint- in Part III, expense amounts are shown as positive amounts. Therefore, if a book-tax difference reduces book expense, you will show a negative number in the Temporary or Permanent columns.
6. The book-tax differences associated with capital losses and income tax expense have already been completed for you.
7. In Part III, total each column in Row 38 - column (a) has already been totaled for you.
8. in Part II, subtotal each column in Row 26 as instructed on the form - column (a) has already been subtotaled for you.
9. In Part II Line 27, fill in the amounts you totaled for each column in (d) above.
10. In Part II, input the total for each column in Row 30, following the specific instructions on the form.
11. Checkpoint - Schedule M-3 Part II Row 30 column (d) should equal the taxable income you calculated in Step 1 (on the "Book-to-tax Rec" Excel worksheet).
12. Scan the completed Schedule M-3 and upload to Canvas.

Option 2

1. Access a fill-able version ofSchedule M-3 on the IRS site(Links to an external site.)
2. Download the form to your hard drive.
3. Open the file titled "Schedule M-3 - partially completed.pdf" and input all information found in that form into your fill-able version of Schedule M-3.
4. Follow the instructions covered in Option 1, #2 above.
5. Checkpoint - Schedule M-3 Part II Row 30 column (d) should equal the taxable income you calculated in Step 1 (on the "Book-to-tax Rec" Excel worksheet).
6. Save the completed Schedule M-3 and upload to Canvas.

Oh Gnome You Didn't, Inc. 2018 Taxable Income Calculation ***Accuracy Checkpoint Below*** Book Net Income/(Loss) 571,550 Non-Deductible Tax Expense 168,321 Permanent Book/Tax Differences Interest Income - Municipal Bond Investment Expense - Municipal Bond Entertainment Expense Meals Expense Total Permanent Differences Temporary Book/ Tax Differences Depreciation Prepaid Property Taxes Capital Loss Charitable Contributions #DIV/O! Amortization #DIV/0! Organizational Costs #DIV/0! Allowance for Doubtful Accounts Stock Compensation Expense 0 Total Temporary Differences #DIV/O! 2018 Taxable Income #DIV/O! Accuracy Checkpoint - Correct Answer 161,836 Variance (should be within +/- 1.0) #DIV/0!Oh Gnome You Didn't, Inc. Permanent Book/Tax Differences - Supporting Calculations Select from the provided list of options Manual input is required Disallowed % Type of Book/Tax Type of Perm Adjustment Reason for Perm Adjustment Acct. Number Account Name Amount for Tax Schedule M Difference Interest Income - Municipal Bond #N/A 0 Investment Expense - Municipal Bond #N/A Entertainment Expense #N/A Meals Expense #N/A Non-deductible Tax Expense Acct. Number Account Name Amount Federal Current Tax Expense 585 Federal Current Tax Expense 33,986 Federal Deferred Tax Expense 586 Federal Deferred Tax Expense 122,646 State Deferred Tax Expense 591 State Deferred Tax Expense 11,689 Disallowed Income Tax Expense 168,321Oh Gnome You Didn't, Inc. Temporary Book/Tax Differences - Supporting Calculations Select from the provided list of option Manual input is required Allowance for Doubtful Accounts Type of Book/Tax Acct. Number Account Name Beg. Balance End. Balance Schedule M Difference #N/A 0 Prepaid Property Taxes Type of Book/Tax Acct. Number Account Name Beg. Balance End. Balance Schedule M Difference #N/A 0 0 Capital Loss Expense Type of Book/Tax Acct. Number Account Name Amount Difference IN/A Allowable Tax Deduction Schedule M 0 Stock Compensation Expense Expense Type of Book/Tax Acct. Number Account Name Amount Difference #N/A Allowable Tax Deduction Schedule M 0Allowable Tax Deduction Stock Compensation Expense Schedule M Expense Type of Book/Tax Acct. Number Account Name Amount Difference Tentative Taxable Income IN/A Add: Charitable Contributions Allowable Tax Deduction Modified Taxable Income Schedule M 0 Tax Deduction Limitation % Tax Deduction Limitation Depreciation Useful Life Bonus Depr. Bonus Regular 2018 Tax Acct. Number Account Name Asset Cost (in months) Allowance % Depreciation Depreciation Depreciation IN/A 84 #N/A 60 #N/A 60 Tax Depreciation Acct. Number (Book Depreciation Expense) #N/A Type of Book/Tax Difference Schedule M Amortization Recovery Period 2018 Tax Acct. Number Account Name Asset Cost (in months) # of Months Amortization #N/A #DIV/O! #N/A #DIV/O! DIV/O! Tax Amortization #DIV/O! Acct. Number (Book Amortization Expense) #N/A Type of Book/Tax Difference Schedule M #DIV/O!Organizational Costs Expense Type of Book/Tax Acct. Number Account Name Amount Difference #N/A Allowable Tax Deduction #DIV/O! Schedule M #DIV/0! Maximum Immediate Expense Immediate Expense Phaseout Allowable Immediate Expense Amortizable Expense Recovery Period (months) # of Months in 2018 2018 Org Cost Amortization #DIV/O! Charitable Contributions Expense Type of Book/Tax Acct. Number Account Name Amount Difference #N/A Allowable Tax Deduction #DIV/O! Schedule M #DIV/0! Tentative Taxable Income #DIV/O! *includes deduction for total charitable contributions Add: Charitable Contributions Modified Taxable Income #DIV/O! Tax Deduction Limitation Tax Deduction Limitation #DIV/O!Schedule M-3 [Form 1120)2017 Papa 2 Nama of corpantion (common paran, if consolidated return) Employer identification mumb ar Oh Gnome You Didn't, Inc. 68-75308 Chuck applicable bookant ] Consolidated group (2) | |Parent corp 14 Subsidiary corp ) Mixed 11201/PC group Check If a sub-consolidated: (0 1120 group 01 1120 eliminations Name of subsidiary If consolidated return Employer Identification number Part II Reconciliation of Net Income (Loss) per Income Statement of Includible Corporations With Taxable Income per Return (see instructions Income (Loss) Items Attach statements for lines 1 through 12) Income [Loss) per Temporary Permanent Income Statement Difference Income [Lossi Income (loss) from equity method foreign corporations Gross foreign dividends not previously taxed . Subpart F, OFF, and similar income inclusions 4 Section 78 gross-up . . 5 Gross foreign distributions previously taxed 5 Income (1088) from equity method U.S. corporations 7 U.S. dividends not eliminated in tax consolidation 8 Minority interest for includible corporations 0 Income (loss) from U.S. partnerships 10 Income (loss) from foreign partnerships 11 Income (loss) from other pass-through entities 12 Items relating to reportable transactions 13 Interest income (see instructions) 6,000 14 Total accrual to cash adjustment . 15 Hedging transactions 16 Mark-to-market income (loss) - 17 Cost of goods sold (see instructions) 18 Sale versus lease (for sellers and/or lessors) 19 Section 481(a) adjustments 20 Unearned/deferred revenue 21 Income recognition from long-term contracts 22 Original issue discount and other imputed interest 23a Income statement gainloss on sale, exchange, abandonment, worthlessness, or other disposition of assets other than inventory and pass-through entities (25.000) 25,000 b Gross capital gains from Schedule D, excluding amounts from pass-through entities . Gross capital losses from Schedule D, excluding amounts from pass-through entities, abandonment losses, and worthless stock losses 25,000 (25,000) d Net gainloss reported on Form 4797, line 17, excluding amounts from pass-through entities, abandonment losses, and worthless stock losses * Abandonment losses "Worthless stock losses (attach statement) . 9 Other gainloss on disposition of assets other than Inventory 24 Capital loss limitation and carryforward used . 25 Other income (loss) items with differences (attach statement) 26 Total income (loss) Items. Combine lines 1 through 25 (19.400) 27 Total expense/deduction items (from Part II, line 39) 614 4501 28 Other Items with no differences 1,205,000 1,205,000 29a Mixed groups, see instructions, All others, combine ines 26 through 28. b PC Insurance subgroup reconciliation totals e Life Insurance subgroup reconciliation totals . 30 Reconciliation totals. Combine lines 29a through 29c 571,550 Note: Line 30, column (a), must equal Part I, Ine 11, and column (d) must equal Form 1120, page 1, Ine 28. #chaduia M-3 [Form 1180] 2017Schedule M-3 [Form 1120) 2017 Papa 3 Mama of corponion (common parent, if consolidated return) Employer identification number Oh Gnome You Didn't, Inc. 66-75308 Chack applicable boopit ] Consolidated group (2) | Parent corp 13 Consolidated siminations 14 Subsidiary corp ) Mixed 1120L/PC group Check If' a sub-consolidated: 00 _ 1120 group (71 1 120 eliminations Name of subsidiary If consolidated returnl Employer Identification number Part III Reconciliation of Net Income (Loss) per Income Statement of Includible Corporations With Taxable Income per Return-Expense/Deduction Items (see instructions Expense/Deduction Items Expense per Temporary Permanent Deduction par Incorrea Slalomant Dillaninca Tax Farturn U.S, current income tax expense . 43,986 (23 986) 2 U.S. deferred income tax expense 122,-16 122 6-16) 3 State and local current income tax expense 34,182 M.182 4 State and local deferred income tax expanse . 11,689 (11 689) 5 Foreign current Income tax expense (other than foreign withholding taxes) . 5 Foreign deferred income tax expense 7 Foreign withholding taxes Interest expense (see instructions) $4,000 9 Stock option expense 11,176 10 Other equity-based compensation 11 Meals and entertainment 11,700 12 Fines and penalties 13 Judgments, damages, awards, and similar costs 14 Parachute payments - 15 Compensation with section 162/my limitation . 16 Pension and profit-sharing . 17 Other post-retirement benefits 18 Deferred compensation . 10 Charitable contribution of cash and tangible property . 20,500 20 Charitable contribution of Intangible property 21 Charitable contribution limitation/carryforward 22 Domestic production activities deduction . 23 Current year acquisition or reorganization investment banking fees 24 Current year acquisition or reorganization legal and accounting fees 51,800 25 Current year acquisitionre organization other costs . 26 Amortization/impairment of goodwill 27 Amortization of acquisition, reorganization, and start-up costs . 34.827 20 Other amortization or impairment write-offs 20 Reserved 30 Depletion 31 Depreciation 142,125 32 Bad debt expense 13,427 33 Corporate owned life insurance premiums 34 Purchase versus lease (for purchasers andfor lessees) . 35 Research and development costs 36 Section 118 exclusion (attach statement) . 37 Other expense/deduction items with differences (attach statement 2,392 30 Total expense/deduction items. Combine Ines 1 through 37. Enter here and on Part II, line 27, reporting positive amounts as negative and negative amounts as positive . 614,450 Scheduls M-3 [Form 1180) 2017Answer: Consolidated Worksheet Consolidation Entry Non Consolidated Prange Seaman Debit Credit Controlling Balance Income Statement: Sales $600,000 $380,000 $100,000 $880.000 Less: Expenses $500,000 $290,000 $20,000 $104,000 $706,000 Income from subsidiary $90,000 $90,000 Consolidated Net Income $190,000 $90,000 $210,000 $104.000 $174,000 Non Controlling Interest Net Income (Controlling Interest) $174,000 Retained Earnings Statement: Retained Earnings, Jan 1 $492,000 $200,000 $232,000 Net Income $190,000 $90,000 $210,000 $104,000 Dividend Paid $60,000 $30,000 $30,000 Retained Earnings, Dec 3] $622,000 $260,000 $442,000 $134,000 $574,000 Inventory, December 31 $100,000 $105,000 $8,000 $197,000 Current Assets $207,000 $325,000 $20,000 $512,000 Investment in subsidiary $710,000 $710.000 Land $140,000 $80,000 $220,000 Building $315,000 $340,000 $655,000 Less: Depreciation $220,000 $130,000 $40,000 $390,000 |Patent $20,000 $200,000 $220,000 Total Assets $1,272,000 $720.000 $200,000 $778,000 $1,414,000 Accounts Payable $150,000 $70,000 $20,000 $200,000 Bond Payable $100,000 $100,000 Other Long term liabilities $200,000 $40,000 $240,000 Common Stock $200,000 $150,000 $150,000 $200,000 Additional Paid in capital $100,000 $100,000 $100,000 $100,000 Retained Earnings, Dec 31 $622,000 $260,000 $442,000 $134,000 $574,000 Total Liabilities & Sh.Equity $1,272,000 $720,000 $712,000 $134,000 $1,414,000 Workings: Retained Earnings (Debit): = Retained Earnings (Seamon) + Accumulated Depreciation + Beginning Inventory (opening) - $200,000+ $20,000+ $12,000