Question

You have been assigned to compute the income tax provision for Motown Memories Inc. (MM) as of December 31, 2018. The company’s income statement for 2018 is provided below:

Motown Memories Inc.
Statement of Operations at December 31, 2018
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	BOY Cumulative T/D		Beginning Deferred Taxes (@ 21%)		Current Year Change		EOY Cumulative T/D		Ending Deferred Taxes (@ 21%)
Accumulated depreciation	$(8,000,000)		$(1,680,000)		$(1,000,000)		$(9,000,000)		$(1,890,000)
Deductible Temporary Differences	BOY Cumulative T/D		Beginning Deferred Taxes (@ 21%)		Current Year Change		EOY Cumulative T/D		Ending Deferred Taxes (@ 21%)
Allowance for bad debts	$200,000		$42,000		$50,000		$250,000		$52,500
Reserve for warranties	100,000		21,000		20,000		120,000		25,200
Inventory §263A adjustment	240,000		50,400		60,000		300,000		63,000
Deferred compensation	50,000		10,500		10,000		60,000		12,600
Accrued pension liabilities	3,000,000		630,000		250,000		3,250,000		682,500
Total	$3,590,000		$753,900		$390,000		$3,980,000		$835,800

Required:

Compute MM’s current income tax expense or benefit for 2018.

Compute MM’s total income tax provision for 2018.

Prepare a reconciliation of MM’s total income tax provision with its hypothetical income tax expense of 21% in both dollars and rates.

Prepare a reconciliation of MM’s total income tax provision with its hypothetical income tax expense of 21% in both dollars and rates. (Amounts to be deducted should be indicated by a minus sign. Round your percentage answers to 2 decimal places.)

	Reconciliation of Effective Tax Rate Dollars Percent Tax provision before adjustments % Interest from municipal bonds % Nondeductible meals % Nondeductible fines % Income tax provision %

Thank you this is for taxiation

Answer 1

Part A: Current income tax expense or benefit for 2018

Income before income taxes	$	15,000,000
Interest from municipal bonds	$	(50,000)
Non-deductible meals and entertainment expenses (M&E)	$	20,000
Non-deductible fines	$	5,000
Book equivalent of taxable income	$	14,975,000
Net change in cumulative Taxable (Favourable) Temporary Differences (TTD)	$	(1,000,000)
Net change in cumulative Deductible Temporary Differences (DTD)		390,000
Net change in cumulative Temporary Differences (TD)		(610,000)
Taxable income	$	14,365,000
X 21%		0.21
Current tax expense	$	3,016,650

Part B: Deferred income tax expense or benefit for 2018

Ending balance in Taxable (Favorable) Temporary Differences (TTD)	$	(1,890,000)
Beginning balance in Taxable (Favorable) Temporary Differences (TTD)		(1,680,000)
Increase in deferred tax liability	$	(210,000)
Ending balance in Taxable Deductible Temporary Differences (DTD)	$	835,800
Beginning balance in Taxable Deductible Temporary Differences (DTD)		753,900
Increase in deferred tax asset	$	81900
Deferred tax expense	$	210,000
Deferred tax benefit		(81900)
Net deferred tax expense	$	128100
Tax provision: current income tax	$	3,016,650
Expense: deferred income tax		128100
Total income tax provision	$	3144750

For verification

book equivalent taxable income	$	14,975,000
X 34%		0.21
Taxable income tax provision	$	3144750

Part C: Reconciliation of MM's total income tax provision with its hypothetical income tax expense

Reconciliation of Effective Tax Rate	Dollars		Percent
Provision at 21% ($15,000,000 x 21%)	$	3150000	21%	(3150000/150000000)
Tax exempt interest ($50,000 x 21%)		(10500)	0.07%	(10500/150000000)
Non-deductible meals and entertainment expenses (M&E) ($20,000 x21%)		4200	0.028%	(4200/150000000)
Non-deductible fines ($5,000 x 21%)		1050	0.007%	(1050/150000000)
Provision	$	3144750	21.11%