Permtemp Corporation formed in 2011 and, for that year, reported the following book

income statement and balance sheet, excluding the federal income tax expense, deferred

tax assets, and deferred tax liabilities:

Sales $20,000,000

Cost of goods sold )

Gross profit $ 5,000,000

Dividend income 50,000

Tax-exempt interest income

Total income $ 5,065,000

Expenses:

Depreciation $ 800,000

Bad debts 400,000

Charitable contributions 100,000

Interest 475,000

Meals and entertainment 45,000

Other

Total expenses )

Net loss before federal income taxes )

Cash $ 500,000

Accounts receivable $ 2,000,000

Allowance for doubtful accounts ) 1,750,000

Inventory 4,000,000

Fixed assets $10,000,000

Accumulated depreciation ) 9,200,000

Investment in corporate stock 1,000,000

Investment in tax-exempt bonds

Total assets

Accounts payable $2,610,000

Long-term debt 8,500,000

Common stock 6,000,000

Retained earnings )

Total liabilities and equity

Additional information for 2011:

• The investment in corporate stock is comprised of less-than-20%-owned corporations.

• Depreciation for tax purposes is $1.4 million under MACRS.

• Bad debt expense for tax purposes is $150,000 under the direct writeoff method.

• Limitations to charitable contribution deductions and meals and entertainment

expenses must be tested and applied if necessary.

• Qualified production activities income is zero.

Required for 2011:

a. Prepare page 1 of the 2011 Form 1120, computing the corporation’s NOL.

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 under ASC 740. Use the balance sheet information to prepare Schedule L of

the 2011 Form 1120.

c. Prepare the 2011 Schedule M-3 for Form 1120.

d. Prepare a schedule that reconciles the corporation’s effective tax rate to the statutory

34% tax rate.

Note: For 2011 forms, go to forms and publications, previous years, at the IRS website,

 

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