Income Tax Expense Assignment
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 have identified the following permanent differences: 1) Interest income from municipal bonds of $50,000,
2) Nondeductible meals and entertainment expenses of $20,000, and 3) Nondeductible fines of $5,000 MM prepared the following schedule of temporary differences from the beginning of the year to the end of the year: Motow n Memories, Inc. Temporary Difference Scheduling Template BOY Beginning Current EOY Ending Taxable Cumulative Deferred Year Cumulative Deferred Temporary Differences T/D Taxes (@ 21%) Change T/D Taxes (@ 21%) Accumulated depreciation (8,000,000) (1,680,000) (1,000,000) (9,000,000) (1,890,000) BOY Beginning Current EOY Ending Deductible Cumulative Deferred Year Cumulative Deferred Temporary Differences T/D Taxes (@ 21%) Change T/D 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
a. Compute MM’s current income tax expense or benefit for 2018.
b. Compute MM’s deferred income tax expense or benefit for 2018.
c. Prepare a reconciliation of MM’s total income tax provision with its hypothetical income tax expense of 21% in both dollars and rates.
d. Prepare a tax footnote for MM’s 2018 financial statements. Including a narrative description of the tax position of the Company based on parts a-c. .
