he Golden Eagle Corporation is organized in Oregon, and it operates in several of the western US states
The Golden Eagle Corporation is organized in Oregon, and it operates in
several of the western US states. Golden
Eagle is owned by a small group of private equity investors. It provides catering and “pampering” services
on a contract basis, e.g.,providing support for clients when they are filming
television and web commercials. Golden
Eagle follows generally accepted accounting principles (GAAP), and it is
required to file a Schedule M-3 with its annual Form 1120. It uses a calendar year fortax and book
purposes.
Golden Eagle is
classified as a personal service corporation for federal tax purposes. It is not subject to a state or federal alternative
minimum tax this year, and it holds no minimum tax credits.Golden Eagle’s
balance sheet shows the deferred tax assets and liabilities that were created
in prior years.
Golden Eagle’s CFO has asked for your assistance in generating
information needed for the corporation’s financial statements. The financial accounting records of Golden
Eagle for the current year produce the attached abbreviated trial balance. Other information is available from last
year’s tax file and supporting records.Follow all of the public company
disclosure rules of ASC 740 / FAS 109, without regard to materiality or significance.
For items I and II, use the format found in the partially completed Trial
Balance (Summary) for Golden Eagle. For
item IV, use the format found in the Tax Provision worksheet. For items V, VII, and VIII use the format
found in the Journal Entries worksheet.
For the latter two worksheets, fill in the shaded cells only. All of these worksheets are attached.
I
Using the
information provided, compute book income before taxes for Golden Eagle.
II
Identify and measure Golden Eagle’s book-tax differences. Classify each of the book-tax differences as
temporary or permanent.
III
Your colleagues in the tax department took the trial balance amounts and
first computed the current state income taxes payable as $133. This determination reversed out the book
income tax estimate and applied state tax laws correctly. Then the tax department computed the actual
current federal income tax payable as $729.
No penalties were incurred for underpayment of estimated taxes.Complete the construction of the trial balance.
IV
Determine Golden Eagle’s total tax provision for the year (i.e.,the “tax
accrual”). Take the amounts that you
derived in the trial balance, and from the tax payables given in item III
above, to make this computation. Hint:
Compute the state provision first.
As determined by the tax department, Golden Eagle’s pre-tax temporary
differences are $(665). This amount
should be found on your completed Trial Balance. Using the tax provision amount, compute the
corporation’s effective tax rate to be reported to management.
V
SummarizeGolden Eagle’s changes in its Deferred Tax Assets/Liabilities
for the year, and prepare the journal entry indicated by the change in the net
deferred tax balance.
VI
Additional
InformationGolden Eagle’s CFO informs you that the company does not project that it
will generate any additional net capital gains in the next five years. This fact jeopardizes the corporation’s
ability to use its capital loss carryforward before the five-year period
expires. Management agrees to create a
valuation allowance against the current year’s net deferred tax liability, in
the amount of 60 percent of the carryforward amount. Prepare the journal entry to reflect this ASC
740 / FAS 109 valuation allowance.
VII
Additional
InformationGolden Eagle’s CFO is concerned that some of its current-year
accelerated cost recovery will be disallowed after an IRS audit is
completed. The Golden Eagle tax
department has constructed the following table of the likely outcomes of the
audit negotiations on this point.
Several years will pass before Golden Eagle and the IRS complete the
audit negotiations, but ignore any interest payments that will accrue during
that period. Prepare the journal entry to
reflect this disclosure relative to the current year’s net deferred tax
liability.
Total Cost Recovery
Deduction, as Negotiated with IRS
Probability of the
Parties Agreeing to This Amount
$350
,
10%,
,
,
,
,
$300,
,
,
45%,
,
,
,
,
$250,
,
,
35%,
,
,
,
,
$150,
,
,
10%,
,
,
,
,
VIII,
,
Return to the original set of facts; ignore parts VI and VII. Complete a Schedule M-3 for Golden Eagle. You might organize the Schedule M-3 data,
first on a spreadsheet that you construct, correlated to the Schedule M-3 line
numbers. This allows you more easily to,
copy amounts from other cells that already exist, and to “do the math” and
derive check figures and cross-references as needed. In this regard, work up a detail schedule for
the “Miscellaneous” lines on the schedule, i.e., Part II line 25, and Part III
line 37.,
,
The corporation’s common stock is not publicly traded, but its financial
statements are audited by an independent accounting firm. Use forms for the most current tax year
available at.irs.gov/”>irs.gov. Electronic or hard copy forms can be
used. Do not prepare a Form 8916-A
relative to cost of goods sold or interest amounts. Omit any federal identification numbers.
Information from Golden Eagletax and
accounting files (all $K)
Golden
Eagle’s truck drivers were responsible for $50 in speeding tickets, all of
which the company paid during the current year.
The
interest income was received from bonds issued by ExxonMobil ($30) and the
City of Charleston ($45).
The
Deferred Revenue account was established because Golden Eagle received
full payment this year on a contract for services, one-half of which Golden
Eaglewill perform next year, and one-half of which it will perform the
following year.
Golden
Eagle holds life insurance policies on its five officers. Activity concerning these policies this
year included:
§ $500 proceeds
collected upon the death of the Vice President – Operations
§ $200 premiums paid
§ $45 increase in
cash surrender value of policies
Golden
Eagle sold some of its marketable securities, held as a capital asset per
a previous IRS audit settlement, at a $75 loss.
Golden
Eagle contributed $1,000 to its defined benefit retirement plans, but due
to carryovers $1,750 qualified for an income tax deduction in the current
year.
Golden
Eagle’s tax department reported a $70 total of documented expenses for
meals and entertainment.
Golden
Eagle holds a $60 NOL carryforward, for both state and federal purposes.
Golden
Eagle has elected to forego any federal NOL carryback. None of the states in which Golden Eagle
holds an NOL allows a carryback at this time.
Golden
Eagle accrued a current-year tax expense of $1,000 federal and $200 state.
Statutory
tax rates for Golden Eagle are 35% federal and 6% for the states
(blended). Thus, if needed, the
applicable federal tax rate net of the state tax deduction is 32.9
percent.Unless otherwise noted, state income tax laws piggyback onto
federal income tax provisions in all states in which Golden Eagle has
nexus.None of the states with which Golden Eagle has nexus allows a
deduction for book federal income tax expense.
There
are no enacted state or federal income tax rate changes that apply to Golden
Eagle. Other balance sheet data follow.
Golden
Eagle Corporation
Book Balance
Sheet Summary ($K)
End of
Current Year
Statutory Tax Rate
Federal 35%
State 6%
Federal, net of state tax deduction 32.9% 35% – [(.35) x 6%]
Golden Eagle Corporation
Trial Balance (Summary) ($K)
Current Year
Difference
Total
Book
Tax
Temporary
Permanent
Sales, Expenses with no book-tax differences
20,000
20,000
20,000
Cost of Goods Sold (exclusive of unicap)
16,000
16,000
16,000
Fines Paid to Govts
(50)
(50)
0
50
Bad Debt Expense
(40)
(40)
0
40
UNICAP Adjustment
Interest Income
75
Book Income
Complete
the shaded cells.
Taxable Income
Subtotal
Total
Differences, Before Taxes
(665)
Golden Eagle Corporation
Tax Provision ($000)
Current Year
Summary
Tax Provision
— Current
Tax Provision
— Deferred
Pre-Tax Book Income
Complete
the shaded cells.
Permanent Differences
Adjusted Pre-Tax Income
Federal Income Tax
729
A
State Income Tax
133
B
Tax Provision
Effective Tax Rate, Book
C
A
[Temp Differences – State Deferred] x Federal Rate
B
Temp Diff x State Rate
C
Tax Provision / Pre-Tax Book Income
NOTES
Complete the state provision first.
These amounts also are used on the Schedule M-3, Part III, lines 1
through 4.
Golden Eagle Corporation
ASC 740 / FAS 109 Journal Entries — Condensed
Current Year
JOURNAL ENTRY (Condensed) – Requirement V
DR
CR
Complete
the shaded cells.
Federal Income Tax Expense
State Income Tax Expense
Deferred Tax Liability
Federal Income Tax Payable
729
State Income Tax Payable
133
To
record the tax expense and deferrals for the current year
JOURNAL ENTRY — Requirement VI
DR
CR
Federal Income Tax Expense
State Income Tax Expense
Deferred Tax Asset
To
record the likelihood that the capital loss carryforward will not be recognized
in the future
JOURNAL ENTRY — Requirement VII
DR
CR
Deferred Tax Liability (Federal)
Deferred Tax Liability (State)
ASC 740-10 / FIN 48 Liability
To record the
more-likely-than-not result of a federal income tax audit
