Question

You have been assigned to compute the income tax provision for Motown Memories Inc. (MM) as of December 31, 2019. The company’s income statement for 2019 is provided below: (Leave no answer blank. Enter zero if applicable.)

Motown Memories Inc.
Statement of Operations at December 31, 2019
Net sales	$	50,000,000
Cost of sales		28,000,000
Gross profit	$	22,000,000
Compensation	$	2,000,000
Selling expenses		1,500,000
Depreciation and amortization		4,000,000
Other expenses		500,000
Total operating expenses	$	8,000,000
Income from operations	$	14,000,000
Interest and other income		1,000,000
Income before income taxes	$	15,000,000

You identified the following permanent differences:

Interest income from municipal bonds	$	50,000
Nondeductible meals	$	20,000
Nondeductible fines	$	5,000

MM prepared the following schedule of temporary differences from the beginning of the year to the end of the year:

Motown Memories Inc.
Temporary Difference Scheduling Template
Taxable Temporary Differences		Beginning Deferred Taxes		Current Year Change		EOY Cumulative T/D		EOY Deferred Taxes
Accumulated depreciation		$(1,680,000)		$(1,000,000)		$(9,000,000)		$(1,890,000)
Deductible Temporary Differences		BOY Deferred Taxes		Current Year Change		EOY Cumulative T/D		EOY Deferred Taxes
Allowance for bad debts		$42,000		$50,000		$250,000		$52,500
Reserve for warranties		21,000		20,000		120,000		25,200
Inventory §263A adjustment		50,400		60,000		300,000		63,000
Deferred compensation		10,500		10,000		60,000		12,600
Accrued pension liabilities		630,000		250,000		3,250,000		682,500
Total		$753,900		$390,000		$3,980,000		$835,800

Required:

1. Compute MM’s current income tax expense or benefit for 2019.
2. Compute MM's deferred income tax expense or benefit for 2019.
3. Prepare a reconciliation of MM’s total income tax provision with its hypothetical income tax expense of 21% in both dollars and rates.

Answer 1

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