Permtemp Corporation formed in 2011 and, for that year, reported the following book
income statement and balance sheet, excluding the federal income tax expense, deferred
tax assets, and deferred tax liabilities:
Sales $20,000,000
Cost of goods sold )
Gross profit $ 5,000,000
Dividend income 50,000
Tax-exempt interest income
Total income $ 5,065,000
Expenses:
Depreciation $ 800,000
Bad debts 400,000
Charitable contributions 100,000
Interest 475,000
Meals and entertainment 45,000
Other
Total expenses )
Net loss before federal income taxes )
Cash $ 500,000
Accounts receivable $ 2,000,000
Allowance for doubtful accounts ) 1,750,000
Inventory 4,000,000
Fixed assets $10,000,000
Accumulated depreciation ) 9,200,000
Investment in corporate stock 1,000,000
Investment in tax-exempt bonds
Total assets
Accounts payable $2,610,000
Long-term debt 8,500,000
Common stock 6,000,000
Retained earnings )
Total liabilities and equity
Additional information for 2011:
• The investment in corporate stock is comprised of less-than-20%-owned corporations.
• Depreciation for tax purposes is $1.4 million under MACRS.
• Bad debt expense for tax purposes is $150,000 under the direct writeoff method.
• Limitations to charitable contribution deductions and meals and entertainment
expenses must be tested and applied if necessary.
• Qualified production activities income is zero.
Required for 2011:
a. Prepare page 1 of the 2011 Form 1120, computing the corporation’s NOL.
b. Determine the corporation’s deferred tax asset and deferred tax liability situation, and
then complete the income statement and balance sheet to reflect proper GAAP
accounting under ASC 740. Use the balance sheet information to prepare Schedule L of
the 2011 Form 1120.
c. Prepare the 2011 Schedule M-3 for Form 1120.
d. Prepare a schedule that reconciles the corporation’s effective tax rate to the statutory
34% tax rate.
Note: For 2011 forms, go to forms and publications, previous years, at the IRS website,
www.irs.gov.
For 2012, Permtemp reported the following book income statement and balance sheet,
excluding the federal income tax expense, deferred tax assets, and deferred tax liabilities:
Sales $33,000,000
Cost of goods sold )
Gross profit $11,000,000
Dividend income 55,000
Tax-exempt interest income
Total income $11,070,000
Expenses:
Depreciation $ 800,000
Bad debts 625,000
Charitable contributions 40,000
Interest 455,000
Meals and entertainment 60,000
Other
Total expenses )
Net income before federal income taxes
Cash $ 2,125,000
Accounts receivable $ 3,300,000
Allowance for doubtful accounts ) 2,850,000
Inventory 6,000,000
Fixed assets $10,000,000
Accumulated depreciation ) 8,400,000
Investment in corporate stock 1,000,000
Investment in tax-exempt bonds
Total assets
Accounts payable $ 2,120,000
Long-term debt 8,500,000
Common stock 6,000,000
Retained earnings
Additional information for 2012:
• Depreciation for tax purposes is $2.45 million under MACRS.
• Bad debt expense for tax purposes is $425,000 under the direct writeoff method.
• Qualified production activities income is $3 million.
Required for 2012:
a. Prepare page 1 of the 2012 Form 1120, computing the corporation’s taxable income
and tax liability.
b. Determine the corporation’s deferred tax asset and deferred tax liability situation, and
then complete the income statement and balance sheet to reflect proper GAAP
accounting ASC 740. Use the balance sheet information to prepare Schedule L of the
2012 Form 1120.
c. Prepare the 2012 Schedule M-3 for Form 1120.
d. Prepare a schedule that reconciles the corporation’s effective tax rate to the statutory
34% tax rate.
