Question

You have been assigned to compute the income tax provision for Tulip City Flowers Inc. (TCF) as of December 31, 2017. The company’s federal income tax rate is 34%. The company’s Income Statement for 2017 is provided below:

Tulip City Flowers Inc.
Statement of Operations at December 31, 2017
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
Domestic production activities deduction	$	8,000
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 (@ 34%)		Current Year Change		EOY Cumulative T/D		Ending Deferred Taxes (@ 34%)
Accumulated depreciation	-5,000,000		-1,700,000		-500,000		-5,500,000		-1,870,000
Deductible Temporary Differences	BOY Cumulative T/D		Beginning Deferred Taxes (@ 34%)		Current Year Change		EOY Cumulative T/D		Ending Deferred Taxes (@ 34%)
Allowance for bad debts	100,000		34,000		10,000		110,000		37,400
Prepaid income	0		0		20,000		20,000		6,800
Deferred compensation	50,000		17,000		10,000		60,000		20,400
Accrued pension liabilities	500,000		170,000		100,000		600,000		204,000
Total	650,000		221,000		140,000		790,000		268,600

A)Compute TCF’s deferred income tax expense or benefit for 2017.

B)Assume TCF’s tax rate increased to 35 percent in 2017. Recompute TCF’s deferred income tax expense or benefit for 2017.

Answer 1

Ques B

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 2017
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
Rate	$                                 0
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
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%).