For 2018, 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
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Total Expenses (6,655,000)
___________
Net loss before federal income taxes $4,415,000
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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
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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
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Additional information for 2018:
Assume that $40,000 of the 60,000 meals and entertainment pertained to entertainment and 20,000 pertained to business meals. Because of limitations, effective in 2018, $50,000 of the meals and entertainment expenses will be disallowed for tax purpose.
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 2018 was 21%.
At the end of 2017, Congress reduced the corporate tax rate to 21% effective for 2018.
Required for 2017:
Prepare page 1 of the 2018 Form 1120, computing the corporation’s taxable income and tax liability.
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 2018 Form 1120.
Prepare the 2018 Schedule M-3 for Form 1120.
Prepare a schedule that reconciles the corporation’s effective tax rate to the statutory 21% tax rate.
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