Top Hat, Inc. has closed out their 2022 tax year. The client is a manufacturer and...

  

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Top Hat, Inc. has closed out their 2022 tax year. The client is a manufacturer and has inventory. They are taxed as a C Corporation and use the accrual method of accounting for their financial statements and their tax returns. The company only has nexus with the State of Florida. Listed below are the final numbers from their audited financial statements. • Gross revenues $29,938,200 Cost of Goods Sold $16,140,020 Interest Income $10,042 • • • Tax exempt interest income $1309 Salary expense $4,125,000 Interest expense $1,650,000 Bad debt expense $368,000 • Federal tax expense $245,928 • Florida income tax expense $36,000 • Business meals $255,930 • Entertainment $47,525 • Commissions to salespeople $1,542,000 • Bank charges $120,000 Professional fees $423,000 • Office and warehouse supplies (not inventory) $734,000 • General liability insurance $491,000 1. Earlier in 2022, they recovered some A/R that had previously been written off in a prior year in the amount of $16,650. 2. Included in the audited financial statement expense for bad debts was an increase in their allowance for bad debts for their estimate that 1% of gross revenue that will not be collectible. They also determined that $52,475 was actually uncollectible and it was written off. The total increase to the allowance account was $246,907. 3. They received a $20,000 award from an industry contest that they entered with one of their new products. 4. Tangible property placed into service this year was $4,850,000. They plan to fully expense the assets for tax purposes. The book depreciation is $400,000. 5. In addition to the Florida tax liability, they had to pay $1,322 in penalties to the State of Florida for not filing and paying timely. 6. Annually, they record a reserve on inventory to account for lost, damaged or obsolete products. The annual accrual is $200,000. 7. They have key man life insurance premiums in the amount of $6,500 per year. The CEO passed away on November 25 and $2,000,000 life insurance was received on December 8th, 8. They have a deferred compensation plan for their top executives. They will record the expense and increase their liability by $725,000 this year. In December, $800,000 was paid out of the plan to a retiring executive. 9. Bonus to all employees accrued at year end for $500,000. Cash flow was down at the beginning of 2023. They paid out $180,000 of the 2022 bonus in February and the balance of $320,000 on April 1, 2023. 10. When the company assets were purchased in 2018, Top Hat Inc. also paid $1,500,000 for goodwill. Requirement 1 (25 points) 1. Compute book income for 2022. Show your work in the format of a Profit & Loss Statement. Use the template provided. (6 points) 2. List all permanent book/tax adjustments. Elther show the adjustment as a positive or negative or note it as favorable or unfavorable. (5 points) 3. List all temporary book/tax differences. Either show the adjustment as a positive or negative or note it as favorable or unfavorable. (8 points) 4. Assume that Top Hat Inc does not meet the exception for small businesses and use $5,000,000 as adjusted taxable income for 2022. Calculate the excess business interest limitation and record the M-1 adjustment. (1 point) 5. Compute income tax loss for 2022. (1 point) 6. What is the amount of the NOL that will be carried forward to 2023? (1 point) 7. Compute the Taxes Payable, Tax Expense and the Deferred Tax Asset or Liability. (3 points) Requirement 2 (15 points) As stated in the information above, the total fixed assets placed in service for the year were $4,850,000. The assets consisted of the following: a. $700,000 computers purchased on 5/1/22. b. $450,000 desks and other office furniture purchased on 7/7/22. c. $1,700,000 for manufacturing equipment (not food equipment) placed in service 8/1/22. d. 1,900,000 of leasehold improvements placed in service on 1/1/22. e. $100,000 for a Mercedes delivery van placed in service on 3/15/22. The gross vehicle weight (GVW) exceeds 6,000 pounds. 1. List the MACRS Recovery Period for each asset. 2. List the depreciation method and convention for each asset. 3. Recalculate the depreciation deduction for 2022 for tax assuming that the corporation decides 4. 5. 6. to elect out of bonus and not to elect $179. What is the new book/tax difference for depreciation? Is the M-1 adjustment favorable or unfavorable? Is the M-1 adjustment temporary or permanent? Requirement 3 (10 points) Top Hat, Inc. uses an 8% discount rate to compute NPV. Top Hat Inc. must decide whether to purchase or lease new manufacturing equipment for use for Years 0 through 7. It could lease the equipment for $20,000 annually (paid at the beginning of each year) or it could purchase the equipment for $100,000. The seller has agreed to finance the sale with no money down, simple interest paid annually at 12.5% at the end of the year, and a $100,000 balloon payment in year 7. The equipment is 7 year MACRS recovery property. Should TopHat Inc. lease or purchase the equipment to minimize the after-tax cost of the use of the property? Top Hat, Inc. has closed out their 2022 tax year. The client is a manufacturer and has inventory. They are taxed as a C Corporation and use the accrual method of accounting for their financial statements and their tax returns. The company only has nexus with the State of Florida. Listed below are the final numbers from their audited financial statements. • Gross revenues $29,938,200 Cost of Goods Sold $16,140,020 Interest Income $10,042 • • • Tax exempt interest income $1309 Salary expense $4,125,000 Interest expense $1,650,000 Bad debt expense $368,000 • Federal tax expense $245,928 • Florida income tax expense $36,000 • Business meals $255,930 • Entertainment $47,525 • Commissions to salespeople $1,542,000 • Bank charges $120,000 Professional fees $423,000 • Office and warehouse supplies (not inventory) $734,000 • General liability insurance $491,000 1. Earlier in 2022, they recovered some A/R that had previously been written off in a prior year in the amount of $16,650. 2. Included in the audited financial statement expense for bad debts was an increase in their allowance for bad debts for their estimate that 1% of gross revenue that will not be collectible. They also determined that $52,475 was actually uncollectible and it was written off. The total increase to the allowance account was $246,907. 3. They received a $20,000 award from an industry contest that they entered with one of their new products. 4. Tangible property placed into service this year was $4,850,000. They plan to fully expense the assets for tax purposes. The book depreciation is $400,000. 5. In addition to the Florida tax liability, they had to pay $1,322 in penalties to the State of Florida for not filing and paying timely. 6. Annually, they record a reserve on inventory to account for lost, damaged or obsolete products. The annual accrual is $200,000. 7. They have key man life insurance premiums in the amount of $6,500 per year. The CEO passed away on November 25 and $2,000,000 life insurance was received on December 8th, 8. They have a deferred compensation plan for their top executives. They will record the expense and increase their liability by $725,000 this year. In December, $800,000 was paid out of the plan to a retiring executive. 9. Bonus to all employees accrued at year end for $500,000. Cash flow was down at the beginning of 2023. They paid out $180,000 of the 2022 bonus in February and the balance of $320,000 on April 1, 2023. 10. When the company assets were purchased in 2018, Top Hat Inc. also paid $1,500,000 for goodwill. Requirement 1 (25 points) 1. Compute book income for 2022. Show your work in the format of a Profit & Loss Statement. Use the template provided. (6 points) 2. List all permanent book/tax adjustments. Elther show the adjustment as a positive or negative or note it as favorable or unfavorable. (5 points) 3. List all temporary book/tax differences. Either show the adjustment as a positive or negative or note it as favorable or unfavorable. (8 points) 4. Assume that Top Hat Inc does not meet the exception for small businesses and use $5,000,000 as adjusted taxable income for 2022. Calculate the excess business interest limitation and record the M-1 adjustment. (1 point) 5. Compute income tax loss for 2022. (1 point) 6. What is the amount of the NOL that will be carried forward to 2023? (1 point) 7. Compute the Taxes Payable, Tax Expense and the Deferred Tax Asset or Liability. (3 points) Requirement 2 (15 points) As stated in the information above, the total fixed assets placed in service for the year were $4,850,000. The assets consisted of the following: a. $700,000 computers purchased on 5/1/22. b. $450,000 desks and other office furniture purchased on 7/7/22. c. $1,700,000 for manufacturing equipment (not food equipment) placed in service 8/1/22. d. 1,900,000 of leasehold improvements placed in service on 1/1/22. e. $100,000 for a Mercedes delivery van placed in service on 3/15/22. The gross vehicle weight (GVW) exceeds 6,000 pounds. 1. List the MACRS Recovery Period for each asset. 2. List the depreciation method and convention for each asset. 3. Recalculate the depreciation deduction for 2022 for tax assuming that the corporation decides 4. 5. 6. to elect out of bonus and not to elect $179. What is the new book/tax difference for depreciation? Is the M-1 adjustment favorable or unfavorable? Is the M-1 adjustment temporary or permanent? Requirement 3 (10 points) Top Hat, Inc. uses an 8% discount rate to compute NPV. Top Hat Inc. must decide whether to purchase or lease new manufacturing equipment for use for Years 0 through 7. It could lease the equipment for $20,000 annually (paid at the beginning of each year) or it could purchase the equipment for $100,000. The seller has agreed to finance the sale with no money down, simple interest paid annually at 12.5% at the end of the year, and a $100,000 balloon payment in year 7. The equipment is 7 year MACRS recovery property. Should TopHat Inc. lease or purchase the equipment to minimize the after-tax cost of the use of the property?