As the new associate of Corporate Accounting and Reporting for ABC Company, one of your assignments is
Question:
As the new associate of Corporate Accounting and Reporting for ABC Company, one of your assignments is accounting for income taxes for the year just ended.
You gather the following information:
• The company operates in a state that has no corporate income tax, so federal income tax is the only issue.
• The preliminary income statement (it lacks tax expense and earnings per share information) shows that income before tax is $10,000,000 (exactly, you ask but are told it’s correct).
• Depreciation expense for the year (reflected in the income before tax amount above) is $3,750,000. Depreciation expense prepared for tax purposes is expected to be $4,889,000, more than $1 million higher due to accelerated tax depreciation.
• The company invests in municipal bonds, which provide tax-free interest income. Income earned during the past year was $135,000.
• The company spent a total of $435,500 on meals and entertainment. Only 50% of those expenses are tax-deductible.
• The company has a small manufacturing facility nearby that is in an “enterprise zone.” Earnings in those areas are not subject to federal income tax (it’s designed to attract businesses to areas where unemployment is high). ABC company determined that $875,000 of income before tax was earned by that facility.
• During the last week of the year, the company recorded an expense of $225,000 for inventory that cannot be sold. The company plans to scrap the inventory soon, but of course, the expense is not deductible for tax purposes until the inventory is physically removed.
Required:
1. Prepare the journal entry to record the tax provision, taxes payable, and deferred taxes for the year just ended.
2. Calculate the effective tax rate for the year and identify the reasons it differs from 21% (the federal statutory rate). You can do this in a reconciliation format if you wish, just so the items affecting the rate are identified
