c11 chp 02 1b reconcile book tax income 2011

7/30/2019 C11 Chp 02 1B Reconcile Book Tax Income 2011

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Chapter 2B.

Corp. TaxationReconciliation of Book

and Taxable Income

Howard Godfrey, Ph.D., CPAProfessor of AccountingCopyright 2011

Edited December 28, 2010


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Reconcile taxand bookincome

[Page 25+]


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Corporation governed largely by

Section 162 when determiningdeductibility of payments toshareholders.

Shareholders governed largelyby Sections 162 and 212 whenmaking corporate relatedexpenditures, but are limited bySections 262 and 263(a)(1).


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162(a) In General. There shall beallowed as a deduction all the ordinaryand necessary expenses in carrying

on any trade or business, including-

(1) a reasonable allowance for salaries..

(2) traveling expenses

(3) rentals


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What is the presumption in theCode regarding the relationshipof corporate activities andSection 162(a)?

Does Section 212 apply tocorporations?


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Corporation's Taxable Income.Business Expenses. Deductions are

allowed for ordinary and necessarybusiness expenses.

No deduction is allowed for interest on

amounts borrowed to purchase tax-exempt securities, illegal bribes orkickbacks, fines or penalties imposed

by a government, or insurancepremiums incurred to insure the livesof officers and employees when thecorporation is the beneficiary.


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Return

Income per books-2011 $400,000 $400,000

Book Income includes:

Municipal bond Interest 8,000

Meals & entertain. Exp. 20,000Prem. - officers' life ins.

(corp. is beneficiary) 3,800

Capital losses 1,000Fines 200

What is taxable income?

Char. Corp.-organized 1-1-2011


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Return

Income per books-2011 $400,000 $400,000Book Income includes:

Municipal bond Interest 8,000 (8,000)

Meals & entertain. Exp. 20,000 10,000Prem. - officers' life ins.

(corp. is beneficiary) 3,800 3,800

Capital losses 1,000 1,000

Fines 200 200

What is taxable income? $407,000

Char. Corp.-organized 1-1-2011


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UNCC Corporation - 1 of 3

Compute Tax. Income Debit CreditsSales $700,000

Cost of sales $400,000

Mun. bond interest 2,000Compensation 100,000

Meals, entertain-Gros 20,000

Other Expense 140,000Subtotal 660,000 702,000

Net Income before tax


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UNCC Cor - 2 of 3 Debit CreditsSales $700,000

Cost of sales $400,000Mun. bond interest 2,000Com ensation 100,000Meals, entertain. (Gross) 20,000

Other Ex ense 140,000Subtotal 660,000 702,000Net Income before tax 42,000Add: one half of entertain.

Less: Mun. bond interestTaxable incomeIncome TaxCom ute E & P (Similar to Retained Earnin s)


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UNCC Corp - 3 of 3 Debit CreditsSales $700,000

Cost of sales $400,000Mun. bond interest 2,000Com ensation 100,000Meals, entertain. Gross 20,000

Other Ex ense 140,000Subtotal 660,000 702,000Net Income before tax 42,000Add: One half of entertain. 10,000

Less: Mun. bond interest (2,000)Taxable income 50,000Income Tax 7,500Com ute E & P Similar to Retained Earnin s


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Blue CorporationBlue Corp. reported GAAP netincome before income tax of$400,000 in its first year of

operation.Financial Statements include baddebts expense of $3,000.

Blue Corp. wrote-off bad debtstotaling $2,000 in first year.Taxable income for the year?____


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X Corp. taxable income in first year: $400,000.

Fin. Statements: bad debts exp. of $3,000.

X Corp. wrote-off bad debts totaling $2,000.

Taxable income will be $400,000 in future.

Fin. statements at end of first year include:a. Deferred tax asset of $340

b. Deferred tax asset of $660

c. Deferred tax liability of $340

d. Deferred tax liability of $660


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GAAP- 2011- Income Statement:

Sales (Gross) $200,000Cost of sales 100,000

Gross Profit 100,000

Expenses 60,000

Net income before taxes $40,000

For GAAP, company charges 4% of

gross sales to bad debts expense.

Allow. for bad debts, 12/31/2010 $5,000Allow. for bad debts, 12/31/2011 4,000

What is taxable income for 2011?

a. $ 40,000 b. $42,000 c. $39,000 d. $38,00

Big Corp. Bad Debts-Sec. 166


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Bad Debts. Direct write-off for Tax Purposes

Amounts in$Thousands GAAP Tax GAAP Tax

Sales $800 $800 $800 $800

Cost of Sales 500 500 500 500

Gross Margin 300 300 300 300

Bad Debts Expense 80 60 50 60

Total other expenses 100 100 120 120

Net Income Before Tax $120 $140 $130 $120

Assume income tax rate is 34%

Amount of the deferred tax asset at 12-31-2011?

Sales Co. (Co. started in 2010) [1]

2010 2011


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Book TaxableYear Income Income

2008 $120,000 $140,000

2009 130,000 120,000

Total 250,000 260,000

10,00034%

$3,400

Sales Co. [2]

DifferenceMarginal rate

Deferred Tax Asset


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Sales $100

Bad debts (provision) 5Other Ex enses 80Total Ex enses 85

Net Income before Taxes $15Beg. End.

Accounts Receivable $80 $85

Allow. for Bad Debts $7 $4

Amount of Acct. Rec. written off?


Bad Debts Problem ($000)


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Beg. Bal. XXX 80 71 Sales

2 Collection

3 Write-off

4 Other Exp.5 Provision

Balance

1 Sales

4 Other Exp.

5 Provision

Bad Debts Problem

Cash AllowanceAccts. Rec.Transaction

Revenue

Revenue and Expense ($000)

Bad Debts Exp.Other Exp.Transaction


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Book income before tax $400,000

Revenue included:Tax-exempt interest income 8,000

Expenses included:

Meal & Entertainment Exp. 22,000

Life insurance premium 3,300

Fines 200

Taxable income

Tax Rate

Income Tax Liability

Maxwell Corp. Book/Tax Differences


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Tax-exempt interest income

Meal & Entertainment Exp.

(50% x $22,000)

Life insurance premium

Fines

Taxable incomeTax Rate 34%

Income Tax Liability

All adjustments - permanent differences.

Maxwell Corp. Book/Tax Differences


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Tax-exempt interest income (8,000)

Meal & Entertainment Exp.

(50% x $22,000) 11,000

Life insurance premium 3,300

Fines 200

Taxable income $406,500Tax Rate 34%

Income Tax Liability $138,210

All adjustments - permanent differences?

axwell Corp. Book/Tax Difference


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Maxwell Corp. Book/Tax

Please prepare

schedule M-1.

Appendix pg. B-32of your textbook.


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Schedule M-1 Reconciliation of Income (Loss) per Books with Income per Return

1 Net income (loss) per books...... 7 Income recorded on books this year

2 Federal income tax.............................not included on this return (itemize):

3 Excess of capital losses over capi tal gains Tax-exempt interest.

4 Income subject to tax not recorded on

books this year (itemize): 8 Deductions on this return not charged

against book income this year (itemize):

5 Expenses recorded on books this yr, a. Depreciation

not deducted on this retum (itemize): b. Charitable Contributions

a Depreciation ..............

bContributions ....

c Travel and entertainment...

9 Add lines 7 and 8

6 Add lines 1 throuqh 5 10 Income (Line 28, pg 1) - ln 6 less ln 9


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Schedule M-1 Reconciliation of Income (Loss) per Books with Income per Return

1 Net income (loss) per books...... $400,000 7 Income recorded on books this year

2 Federal income tax.............................not included on this return (itemize):

3 Excess of capital losses over capi tal gains Tax-exempt interest. $8,000

4 Income subject to tax not recorded on $8,000

books this year (itemize): 8 Deductions on this return not charged

against book income this year (itemize):

5 Expenses recorded on books this yr, a. Depreciation

not deducted on this retum (itemize): b. Charitable Contributions

a Depreciation ..............

bContributions ....

c Travel and entertainment... $11,000

Life Ins. Prem. $3,300 Fines $200 $14,500 9 Add lines 7 and 8 $8,000

6 Add lines 1 throuqh 5 $414,500 10 Income (Line 28, pg 1) - ln 6 less ln 9 $406,500


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Sales $100

Bad debts ( rovision) 5Other Ex enses cash 80Total Ex enses 85Net Income before Taxes $15

Beg. End.Accounts Receivable $80 $85Allow. for Bad Debts $7 $4

Amount collected from customers?Amount of Net Cash Flow-before taxes?

What is Taxable Income?

Accrual to Cash. ($000)-Slide 1


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Beg. Bal. XXX 80 71 Sales

2 Collection

3 Write-off

4 Other Exp.

5 Provision

Balance

1 Sales

4 Other Exp.

5 Provision

Accrual to Cash Problem - Slide 2

Cash AllowanceAccts. Rec.Transaction

Revenue

Revenue and Expense ($000)

Bad Debts Exp.Other Exp.Transaction


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Client recorded 2011 transactions on cash basis

and prepares the tax return on the accrual basis.

Collections from customers in 2011 $300,000

Cash payments for expenses 200,000Other information

Beginning Accounts Receivable 100,000

Ending Accounts Receivable 90,000Write-off of uncollectible accounts 4,000

Depreciation Expense 50,000

Change in accounts payable 0

All sales are on creditDirect Charge-Off Method is used.

What is amount of sales (accrual)?



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Client - Slide 2 of 3Cash Ac-Rec. Other Rev. Exp.

Beg. Bal.

Sales

Collection

Write-off

Deprec.Other Exp.

Balance


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Client - Slide 3 of 3Cash Ac-Rec. Other Rev. Exp.

Beg. Bal. 100

Sales 294 294

Collection 300 (300)

Write-off (4) 4

Deprec. (50) 50Other Exp. (200) 200

Balance 90


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Office Rental Inc. Slide 1 of 6.Office Rental, Inc. collects rent in advance

from some tenants and bills others at theend of each month for that months rent. The

accrual basis income statement (GAAP) for

Year 2 shows revenue earned of $54,700.Rent Receivable was $3,100 at start of Year2 and $2,500 at the end of Year 2.

Unearned Revenue Account had a balanceof $2,600 at start of Year 2 & $1,300 at end ofYear 2. What is cash basis revenue for Year2 (collections from tenants)?


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Year 2 Year 1Balance Sheet

Rent receivable $2,500 $3,100

Unearned revenue $1,300 $2,600

GAAP Income Statement:

Rent Revenue $54,700 $49,800Cash Collections from

tenants for rent?

Office Rental Inc.-Slide 2 of 6


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Year 2 Year 2

Revenue Earned-Yr 2 $54,700 $54,700

Beg. Rent Receivable 3,100

End. Rent Receivable 2,500Beg. Unearned Revenue 2,600

End. Unearned Revenue 1,300

Collected from tenants

In Year 2, you collected receivables

of $3,100 for rent in Year 1, etc.



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Year 2 Year 2

Revenue Earned-Yr 2 $54,700 $54,700

Beg. Rent Receivable 3,100 3,100

End. Rent Receivable 2,500 (2,500)Beg. Unearned Revenu 2,600 (2,600)

End. Unearned Revenue 1,300 1,300

Collected from tenants $54,000

In Year 2, you collected receivables

of $3,100 for rent in Year 1, etc.



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Revenue-accrual basis-Year 2 tax return?

GAAP Revenue for Year 2 54,700Beg. Rent Receivable

End. Rent Receivable

Beg. Unearned Revenue

End. Unearned Revenue

Revenue on Tax ReturnTax law follows GAAP for accruing

receivables, but not for reporting

rent income received in advance.



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Revenue-accrual basis-Year 2 tax return?

GAAP Revenue - Year 2 54,700Beg. Rent ReceivableEnd. Rent Receivable

Beg. Unearned Revenue (2,600)End. Unearned Revenue 1,300Revenue on Tax Return $53,400

Tax law follows GAAP for accruingreceivables, but not for reportingrent income received in advance.



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Realty Corp. Rental IncomeRealty Co. was organized on Jan-1, year 1.

Realty bought a building on that date for$400,000, having an estimated 40-year lifewith no salvage. The S/L depreciationmethod is used for tax & GAAP.

Depreciation is $10,000 per year on the taxreturn and in the GAAP statements.

Realty rented the building to IBM for 2 years

at $20,000 per year. Rent of $40,000 wasreceived on Jan-1, year 1. Realtys incometax rate is 40%. Year 1 operations aredescribed on the next slide.


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GAAP Tax

Rent Revenue $20,000Cash Expenses (5,000)

Depreciation Exp. (10,000)

NIBT/Taxable Income 5,000Income Tax Rate 40%

Income Tax Expense

Income Tax Paid

Net Income

asset or liability at end of Yr 1?

Realty Corporation - Slide 2.

What is the amount of the deferred tax


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GAAP Tax

Rent Revenue $20,000 $40,000Cash Expenses (5,000) (5,000)

Depreciation Exp. (10,000) (10,000)

NIBT/Taxable Income 5,000 25,000Income Tax Rate 40% 40%

Income Tax Expense 2,000

Income Tax Paid 10,000

Net Income 3,000

asset or liability at end of Yr 1?




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GAAP Tax

Rent Revenue $20,000 $40,000Cash Expenses (5,000) (5,000)

Depreciation Exp. (10,000) (10,000)

NIBT/Taxable Income 5,000 25,000Income Tax Rate 40% 40%

Income Tax Expense 2,000

Income Tax Paid 10,000

Net Income 3,000

asset or liability at end of Yr 1? 8,000




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Gross sales in ear 1 $500,000

Cost of sales in ear 1 250,000Other Ex enses in ear 1 100,000Net Income Before Taxes- Yr $150,000Year 1 sales collected in:

Year 1 $300,000Year 2 $200,000

Income Tax Rate 40%Method used for GAAP: Accrual

Method used for Tax: Inst. SalesAmount of deferred tax asset

or liabilit at end of Year 1?

Is it a Def. Asset or Liability?

Income Tax Accounting


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Gross sales in ear 1 $500,000

Cost of sales in ear 1 250,000Other Ex enses in ear 1 100,000Net Income Before Taxes- Yr $150,000Year 1 sales collected in:

Year 1 $300,000Year 2 $200,000

Income Tax Rate 40%Method used for GAAP: Accrual

Method used for Tax: Inst. SalesAmount of deferred tax asset

or liabilit at end of Year 1? 80,000$

Is it a Def. Asset or Liability? Liability

Income Tax Accounting


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Note, the installment sales methodis generally prohibited for dealersin inventory. However it is allowedin limited circumstances.

The problem on the precedingslide is included to help illustratethe differences between accrual

accounting and other revenuerecognition methods and the

impact on deferred taxes.


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The

End

c11 chp 02 1b reconcile book tax income 2011

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