Week 4 Project

Solution1-3

Problem 78
1. Compute TCFs current income tax expense or benefit for 2013
Income before income taxes				$ 4,525,000
Interest from municipal bonds				(10,000)
Nondeductible stock compensation				5,000
DPAD				(8,000)
Nondeductible fines				1,000
Book equivalent of taxable income				$ 4,513,000
Net change in cumulative TTD				(500,000)
Net change in cumulative DTD				140,000
Net change cumulative TD				(360,000)
Taxable income				$ 4,153,000
x 34%				0.34
Current tax expense				$ 1,412,020
2. Compute TCF's deferred income tax expense or benefit for 2013
Ending balance in TTD				$ (1,870,000)
Beginning balance in TTD				(1,700,000)
Increase in deferred tax liability				$ (170,000)
Ending balance in DTD				$ 268,800
Beginning balance in TTD				221,000
Increase in deferred tax asset				$ 47,800
Deferred tax expense				$ 170,000
Deferred tax benefit				(47,800)
Net deferred tax expense				$ 122,200
Tax provision
Current income tax expense				$ 1,412,020
Deferred income tax expense				122,200
Total income tax provision				$ 1,534,220
Check
Book equivalent of taxable income				$ 4,513,000
x 34%				0.34
Total income tax provision				$ 1,534,420
3. Prepare a reconciliation of TCF's total income tax provision with its hypothetical income tax expense
Reconciliation of Effective Tax Rate				Dollars		Percent
Provision at 34% [$4,525,000 x 34%]				$ 1,538,500		34.00%	[$1,538,500/ $4,525,000]
Tax exempt interest ($10,000 x 34%)				(3,400)		-0.08%	[$3,400 / $4,525,000]
Nondeductible stock compensation ($5,000 x 34%)				1,700		0.04%	[$1,700 / $4,525,000]				All these number were changed
DPAD ($8,000 x 34%)				(2,720)		-0.06%	[$2,720 / $4,525,000]
Nondeductible fines ($1,000 x 34%)				340		0.01%	[$340 / $4,525,000]
Provision				$ 1,534,420		33.91%

Solution4

4. Assume TCF’s tax rate increased to 35% in 2013.
Recompute TCF’s deferred income tax expense or benefit for 2013 using the following template:							Changed the year to 2013.
Tulip City Flowers, Inc.
Temporary Difference Scheduling Template
		BOY	Beginning	Current	EOY	Ending
Taxable (Favorable)		Cumulative	Deferred	Year	Cumulative	Deferred
Temporary Differences		T/D	Taxes (@ 34%)	Change	T/D	Taxes (@ 35%)
Non-current
Accumulated depreciation		(5,000,000)	(1,700,000)	(500,000)	(5,500,000)	(1,925,000)
		BOY	Beginning	Current	EOY	Ending
Deductible (Unfavorable)		Cumulative	Deferred	Year	Cumulative	Deferred
Temporary Differences		T/D	Taxes (@ 34%)	Change	T/D	Taxes (@ 35%)
Current
Allowance for bad debts		100,000	34,000	10,000	110,000	38,500
Prepaid income		0	0	20,000	20,000	7,000
Total current		100,000	34,000	30,000	130,000	45,500
Non-Current
Deferred compensation		50,000	17,000	10,000	60,000	21,000
Accrued pension liabilities		500,000	170,000	100,000	600,000	210,000
Total non-current		550,000	187,000	110,000	660,000	231,000
Total		650,000	221,000	140,000	790,000	276,500
Ending balance in TTD				$ (1,925,000)
Beginning balance in TTD				(1,700,000)
Increase in deferred tax liability (expense)				$ (225,000)
Ending balance in DTD				$ 276,500
Beginning balance in TTD				221,000
Increase in deferred tax asset (benefit)				$ 55,500
Deferred tax expense				$ 225,000
Deferred tax benefit				(55,500)
Net deferred tax expense				$ 169,500
Recompute TCFs current income tax expense or benefit for 2012
Income before income taxes				$ 4,525,000
Interest from municipal bonds				(10,000)
Nondeductible stock compensation				5,000
DPAD				(8,000)
Nondeductible fines				1,000
Book equivalent of taxable income				$ 4,513,000
Net change in cumulative TTD				(500,000)
Net change in cumulative DTD				140,000
Net change cumulative TD				(360,000)
Taxable income				$ 4,153,000
x 35%				0.35
Current tax expense				$ 1,453,550
Tax provision
Current income tax expense				$ 1,453,550
Deferred income tax expense				169,500
Total income tax provision				$ 1,623,050
Check
Book equivalent of taxable income				$ 4,513,000
x 35%				0.35
Total income tax provision				$ 1,579,550
The check procedure no longer works because the tax rate changed from the beginning to the end of the year.
The difference of $43,500 ($1,623,050 - $1,579,550) results from tax effecting the net cummulative book differences at the beginning of
of year ($4,350,000) times the change in tax rate (1%).