Question

For 2017, Permatemp reported the following book income statement and balance sheet, excluding the federal income tax expense, deferred tax assets, and deferred tax liabilities:

Sales		$33,000,000
Cost of goods sold		-22,000,000
Gross profit		$11,000,000
Dividend income		55,000
Tax-exempt interest income		15,000
Total income		$11,070,000
Expenses:
Depreciation	$800,000
Bad debts	625,000
Charitable contributions	40,000
Interest	455,000
Meals and entertainment	60,000
Other	4,675,000
Total expenses		-6,655,000
Net income before federal income taxes		$4,415,000
Cash		$2,125,000
Accounts receivable	$    3,300,000
Allowance for doubtful accounts	(450,000)	2,850,000
Inventory		6,000,000
Fixed assets	$10,000,000
Accumulated depreciation	-1,600,000	8,400,000
Investment in corporate stock		1,000,000
Investment in tax-exempt bonds		50,000
Total assets		$20,425,000
Accounts payable		$2,120,000
Long-term debt		8,500,000
Common stock		6,000,000
Retained earnings		3,805,000
Total liabilities and equity		$20,425,000

Additional information for 2017: • Because of limitations, $30,000 of the meals and entertainment expenses will be disallowed for tax purposes.

• Depreciation for tax purposes is $2.45 million under MACRS.

• Bad debt expense for tax purposes is $425,000 under the direct write-off method.

• Ignore the U.S. production activities deduction

• The corporate tax rate in 2017 was 34%. • At the end of 2017, Congress reduced the corporate tax rate to 21% effective for 2018.

a. Prepare page 1 of the 2017 Form 1120, computing the corporation’s taxable income and tax liability.

b. Determine the corporation’s deferred tax asset and deferred tax liability situation, and then complete the income statement and balance sheet to reflect proper GAAP accounting ASC 740. Because of the enacted tax rate change, deferred assets and liabilities at the end of 2017 will need to be valued at 21%. Use the balance sheet information to prepare Schedule L of the 2017 Form 1120.

c. Prepare the 2017 Schedule M-3 for Form 1120. d. Prepare a schedule that reconciles the corporation’s effective tax rate to the statutory 34% tax rate. This schedule will need a line to reflect the change in the future tax rate.

Answer 1

	Answer:
	Calculation of Cashflows
	Particulars	Year 1	Year 2	Year 3	Year 4	Year 5
	Selling units	4000	7000	7000	7000	7000
	Selling price	110	110	110	110	110
	Less: Variable cost	-60	-60	-60	-60	-60
	Contribution per unit	50	50	50	50	50
	Total Contribution	2,00,000	3,50,000	3,50,000	3,50,000	3,50,000
	Less: Fixed cost	-50,000	-50,000	-50,000	-50,000	-50,000
	Less: Depreciaiton	-50,000	-37,500	-28,125	-21,094	-15,820
	Net profit before tax	1,00,000	2,62,500	2,71,875	2,78,906	2,84,180
	Less: Tax @24%	-24,000	-63,000	-65,250	-66,937	-68,203
	Net profit after tax	76,000	1,99,500	2,06,625	2,11,969	2,15,977
	Cashflows	1,26,000	2,37,000	2,34,750	2,33,063	2,31,797
	Calculation of NPV