Question

You have been assigned to compute the income tax provision for Tulip City Flowers Inc. (TCF) as of December 31, 2018. The company’s Income Statement for 2018 is provided below:

Tulip City Flowers Inc.
Statement of Operations at December 31, 2018
Net sales	$	20,000,000
Cost of sales		12,000,000
Gross profit	$	8,000,000
Compensation	$	500,000
Selling expenses		750,000
Depreciation and amortization		1,250,000
Other expenses		1,000,000
Total operating expenses	$	3,500,000
Income from operations	$	4,500,000
Interest and other income		25,000
Income before income taxes	$	4,525,000

You identified the following permanent differences:

Interest income from municipal bonds	$	10,000
Nondeductible stock compensation	$	5,000
Nondeductible fines	$	1,000

TCF prepared the following schedule of temporary differences from the beginning of the year to the end of the year:

Tulip City Flowers Inc.
Temporary Difference Scheduling Template
Taxable Temporary Differences	BOY Cumulative T/D		Beginning Deferred Taxes (@ 21%)		Current Year Change		EOY Cumulative T/D		Ending Deferred Taxes (@ 21%)
Accumulated depreciation	(5,000,000)		(1,050,000)		(500,000)		(5,500,000)		(1,155,000)
Deductible Temporary Differences	BOY Cumulative T/D		Beginning Deferred Taxes (@ 21%)		Current Year Change		EOY Cumulative T/D		Ending Deferred Taxes (@ 21%)
Allowance for bad debts	$100,000		$21,000		$10,000		$110,000		$23,100
Prepaid income	0		0		20,000		20,000		4,200
Deferred compensation	50,000		10,500		10,000		60,000		12,600
Accrued pension liabilities	500,000		105,000		100,000		600,000		126,000
Total	$650,000		$136,500		$140,000		$790,000		$165,900

Required:

1. Compute TCF’s current income tax expense or benefit for 2018.
2. Compute TCF’s total income tax provision for 2018.
3. Prepare a reconciliation of TCF’s total income tax provision with its hypothetical income tax expense of 21% in both dollars and rates.

Answer 1

Part A: Current income tax expense or benefit for 2018

Income before income taxes	$	4525000
Interest from municipal bonds	$	(10,000)
Nondeductible stock compensation	$	5000
Domestic production activities deduction (DPAD)		0
Non-deductible fines	$	1,000
Book equivalent of taxable income	$	4521000
Net change in cumulative Taxable (Favourable) Temporary Differences (TTD)	$	(500,000)
Net change in cumulative Deductible Temporary Differences (DTD)		140,000
Net change in cumulative Temporary Differences (TD)		360,000
Taxable income	$	4161000
X 21%		0.21
Current tax expense	$	873810

Part B: Deferred income tax expense or benefit for 2018

Ending balance in Taxable (Favorable) Temporary Differences (TTD)	$	(1155000)
Beginning balance in Taxable (Favorable) Temporary Differences (TTD)		(1050000)
Increase in deferred tax liability	$	(105000)
Ending balance in Taxable Deductible Temporary Differences (DTD)	$	165900
Beginning balance in Taxable Deductible Temporary Differences (DTD)		136500
Increase in deferred tax asset	$	29400
Deferred tax expense	$	105,000
Deferred tax benefit		(29400)
Net deferred tax expense	$	75600
Tax provision: current income tax	$	873810
Expense: deferred income tax		75600
Total income tax provision	$	949410

For verification

book equivalent taxable income	$	4521000
X 21%		0.21
Taxable income tax provision	$	949410

Part C: Reconciliation of MM's total income tax provision with its hypothetical income tax expense

Reconciliation of Effective Tax Rate	Dollars		Percent
Provision at 21% ($4525000 x 21%)	$	950250	21%	(950250/4525000)
Tax exempt interest ($10,000 x 21%)		(2100)	-0.05%	(2100/4525000)
Nondeductible stock compensation ($5000 x21%)		1050	0.02%	(1050/4525000)
Domestic production activities deduction (DPAD) ($0 x 21%)
Non-deductible fines ($1,000 x 21%)		210	0.005%	(2100/4525000)
Provision	$	949410	21.08%