Solution1-3Problem 78

1. Compute TCFs current income tax expense or benefit for 2013

Income before income taxes$4,525,000Interest from municipal bonds(10,000)Nondeductible stock compensation5,000DPAD(8,000)Nondeductible fines1,000Book equivalent of taxable income$4,513,000

Net change in cumulative TTD(500,000)Net change in cumulative DTD140,000Net change cumulative TD(360,000)

Taxable income$4,153,000x 34%0.34Current 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$268,800Beginning balance in TTD221,000Increase in deferred tax asset$47,800

Deferred tax expense$170,000Deferred tax benefit(47,800)Net deferred tax expense$122,200

Tax provision Current income tax expense$1,412,020 Deferred income tax expense122,200 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 RateDollarsPercent

Provision at 34% [$4,525,000 x 34%]$1,538,50034.00% [$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%)1,7000.04% [$1,700 / $4,525,000]All these number were changedDPAD ($8,000 x 34%)(2,720)-0.06% [$2,720 / $4,525,000]Nondeductible fines ($1,000 x 34%)3400.01% [$340 / $4,525,000]Provision$1,534,42033.91%

Solution44. Assume TCFs tax rate increased to 35% in 2013. Recompute TCFs 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

BOYBeginningCurrentEOYEndingTaxable (Favorable)CumulativeDeferredYearCumulativeDeferredTemporary DifferencesT/DTaxes (@ 34%)ChangeT/DTaxes (@ 35%)

Non-currentAccumulated depreciation(5,000,000)(1,700,000)(500,000)(5,500,000)(1,925,000)

BOYBeginningCurrentEOYEndingDeductible (Unfavorable)CumulativeDeferredYearCumulativeDeferredTemporary DifferencesT/DTaxes (@ 34%)ChangeT/DTaxes (@ 35%)

CurrentAllowance for bad debts100,00034,00010,000110,00038,500Prepaid income0020,00020,0007,000 Total current100,00034,00030,000130,00045,500

Non-CurrentDeferred compensation50,00017,00010,00060,00021,000Accrued pension liabilities500,000170,000100,000600,000210,000 Total non-current550,000187,000110,000660,000231,000

Total650,000221,000140,000790,000276,500

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$276,500Beginning balance in TTD221,000Increase in deferred tax asset (benefit)$55,500

Deferred tax expense$225,000Deferred tax benefit(55,500)Net deferred tax expense$169,500

Recompute TCFs current income tax expense or benefit for 2012

Income before income taxes$4,525,000Interest from municipal bonds(10,000)Nondeductible stock compensation5,000DPAD(8,000)Nondeductible fines1,000Book equivalent of taxable income$4,513,000

Net change in cumulative TTD(500,000)Net change in cumulative DTD140,000Net change cumulative TD(360,000)

Taxable income$4,153,000x 35%0.35Current tax expense$1,453,550

Tax provision Current income tax expense$1,453,550 Deferred income tax expense169,500 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%).