Question 1:
PT Inc., Which has been in business since 1980, uses a fiscal year ending June 30. The shareholders recently voted to dissolve the corporation under state law. PT ceased operations in September and distributed its residual assets to its shareholders in October. PT's final tax return for the year starting on July 1 and ending on October 31 reported $92,000 taxable income.
a) Evaluate PT's tax for its last year using the corporate tax rates.
b) Consider that PT operates an ongoing business and filed the short-period return explained above because the IRS granted permission to change from a fiscal year ending June 30 to a fiscal year ending October 31. How does this modify in fact affect the tax computation?
Question 2:
In 2012, AS, an accrual basis corporation, contracted with a nationally prominent artist to paint a mural in the lobby of the new corporate headquarters under construction. The artist's commission was $180,000, payable on completion of the mural. The artist completed her work and received the $180,000 commission in 2014. AS has a 35 % marginal tax rate and uses a 7 % discount rate to evaluate NPV.
A) Evaluate AS's after-tax cost of the commission if it can deduct the $180,000 accrued expense in 2012.
B) Evaluate AS's after-tax cost of commission if the economic performance requirement delays the dedication until 2014.
Question 3:
EFG, an accrual basis calendar year corporation, reported $500,000 total income before tax on its financial statements prepared in accordance with GAAP. EFG's records reveal the subsequent information.
- The allowance for bad debts as of January 1 was $58,000. Write-offs for the year totaled $13,800, and the addition to the allowance for the year was $12,500. The allowance as of 31st December was $56,700.
- EFG paid a $17,500 fine to the state of Delaware for violation of state pollution control laws.
- EFG was sued by a consumers group fr engaging in false advertising practices. Though EFG's lawyers are convinced that the suit is frivolous, its independent auditors insisted on establishing a $50,000 allowance for contingent legal liability and reporting a $50,000 accrued expense on the income statement.
- EFG received a $165,000 advanced payment for 10,000 units of inventory on October 20. EFG reported the payment as revenue the subsequent February when the units were shipped.
Evaluate EFG's taxable income
Question 4:
Corporation H's auditors prepared the subsequent reconciliation between book and taxable income. H's tax rate is 34 percent.
Total income before tax $600,000
Permanent book/tax differences 15,000
Temporary book/tax differences (76,000)
Taxable income $539,000
a) Evaluate Corporation H's tax expense for financial statement purposes.
b) Evaluate Corporation H's tax payable.
c) Evaluate the net increase in Corporation H's deferred tax assets or deferred tax liabilities (identify which) for the year.