Question

For 2017, Permtemp reported the following book income statement and balance sheet, excluding the federal income tax expenses, 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 $  800,000

Bad Debts 625,000

Charitable Contr.    40,000

Interest 455,000

Meals & Entertainment 60,000

Other 4,675,000
_______________

Total Expenses (6,655,000)  
   ___________
Net loss before federal income taxes $4,415,000
============
Cash $2,125,000

Accounts receivable     $3,300,000

Allowance for doubtful     (450,000)                  2,850,000
   _________
Inventory 6,000,000

Fixed Assets $10,000,000

Acc. depr. (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 writeoff 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.

Required for 2017:

1. Prepare page 1 of the 2017 Form 1120, computing the corporation’s taxable income and tax liability.
2. 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 in the end of 2017 will need to be value at 21%. Use the balance sheet information to prepare Schedule L of the 2017 Form 1120.
3. Prepare the 2017 Schedule M-3 for Form 1120.
4. 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

Sales	33000000
Cost of Goods Sold	22000000
Gross Profit	11000000
Dividend Income	55000
Tax-Exempt Interest Income	15000
Total Income	11070000
Expenses	800000
Bad Debts	625000
Charitable Contr.	40000
Interest	455000
Meals & Entertainment	60000
Others	4675000
Total Expenses	6655000
Net Incmone before federal income taxes	4415000
Cash	2125000
Accounts Receivable	3300000
Less: Allowance for doubtful	-450000
Inventory	6000000
Fixed Assets	10000000
Less: Depreciation	-1600000
Investment in Corporate Stock	1000000
Investment in tax-exempt bonds	50000
Total Assets	20425000
Accounts Payable	2120000
Long-term debt	8500000
Common Stock	6000000
Retained Earnings	3805000
Total Liability	20425000
Particulars	Year 2017
Profit before tax (A)	4,415,000
Depreciation as per Companies Act (B)	2,450,000
Accounting income (A-B)	1,965,000
Depreciation as per Income tax Act ( C )	1,600,000
Taxable income (A-C)	2,815,000
Timing difference(Meals & Entertainment & Bad Debts) (D)	45,500
Current Tax @ 34%	957,100
Deferred Tax (D * 30%)	13,650
Total Tax Expense	970,750
Profit After Tax	994,250