1. Prepare the year-end tax entry for each year. Assume that the tax entries are only prepared at the end of the year, i.e., not at the time of the individual transaction.
2. Prepare a schedule reconciling before tax earnings to taxable income and derive taxes payable.
3. Prepare the schedule of year-end deferred tax assets and liabilities for each year. The schedule should separately list the sources of the firm’s ending deferred tax assets and deferred tax liabilities by their source. For example, the deferred tax asset/liability associated with the book/tax difference associated with the lease should be listed as a single source. The total for each schedule should equal the firm’s deferred tax asset and deferred tax liability balance at the end of the year.
4. Prepare a schedule that reconciles the tax on earnings before tax at the statutory rate to tax expense.

Beginning of Year 1

1. Purchased a municipal bond for its face value of $400,000. The bond has a coupon rate of 6% (payable December 31 of each year), and a five-year maturity. The bond is accounted for as a “held to maturity” debt security.
2. Issued 6,000 restricted share units and 10,000 stock options to employees. The shares are currently trading for $10 per share. The option exercise price is set equal to $10, and the fair value of each option is $3. The vesting service period for the restricted share units and stock options is 18 months.
3. The firm purchased 30% of C Corp. for $700,000. At the time C. Corp. reported assets with a net book value of $2,000,000. The firm accounts for the securities using the equity method. The $100,000 excess of the implied fair value over book value is attributable to intangible assets that are amortized over 5 years.
4. For the defined benefit pension plan, the actuary uses an annual 5% discount rate, and the trustee uses a 6% expected rate of return.
5. Purchased 1,000 shares of D Corp. for $30 per share. The shares are classified as available for sale securities.

You are provided with the following information for Years 1 and 2

	Year 1	Year 2
UOEUG Income before Tax	$900,000	$1,200,000
C Corp. Income (100%)	$300,000	$500,000
C Corp. Dividends (100%)	$120,000	$140,000
Pension Service Cost	$250,000	$280,000
Pension contributions (made at the beginning of the year)	$100,000	$200,000
Actual return on pension assets	$10,000	$40,000
Advanced subscription payments received	$1,200,000	$1,300,000
Insurance premiums paid	$70,000	$80,000
R&D Tax Credit taken each year	$30,000	$50,000
D. Corp. year-end share price	$20	$24

You are also provided with the following year-end balances

	Year 1	Year 2
Unearned revenue	$400,000	$300,000
Prepaid Insurance	$30,000	$50,000
Deferred Tax Valuation Allowance	$15,000	$18,000

Assume the following tax regulations:

1. The statutory tax rate is 25%
2. Lease payments are deductible when made.
3. The firm receives a deduction equal to the employee’s gain on the exercise of the option when the option is exercised and a deduction for value of restricted share units when the restrictions elapse.
4. Interest income on the municipal bond is tax exempt.
5. Income from investments in equity securities is taxable when shares are sold and when dividends are received.
6. Advance payments for subscription payments are taxed when received.
7. Insurance premium payments are deductible when paid.
8. Contributions to the pension fund are tax deductible.

Other information:

1. At the end of year 2 exercised every option was exercised. The fair value of the firm’s stock on this date is $19 per share. The firm’s stock had a value of $13 per share on June 30 of Year 2 when the restricted stock units and the stock options vested.
2. The firm expects every employee receiving restricted share units or stock options will remain for the 18-month required service period.
3. The firm believes that the likelihood that the likelihood that 100% of the expenditures allocated to the tax credit would qualify based on its technical merits is 10%. There is a 30% chance that 80% of the expenditures would qualify, a 20% chance that 65% of the expenditures would qualify, and a 40% chance that 50% of the expenditures would qualify.
4. Year 1 is the first year of operations, i.e., there are no beginning balances
5. Use “Income Taxes Payable” in your year-end journal entry.
6. Round all dollar amounts to the nearest dollar.

Answer rating: 100% (QA)

YearEnd Tax Entry Debit Credit Income Tax Expense Income Taxes Payable X X Schedule Reconciling Before Tax Earnings to Taxable Income and Derive Taxes ... View the full answer