Tulip City Flowers Inc

You have been assigned to compute the income tax provision for Tulip City Flowers Inc. (TCF) as of December 31, 2017. The company’s federal income tax rate is 34 percent. The company’s income statement for 2017 is provided below:

Tulip City Flowers Inc.
Statement of Operations
at December 31, 2017
Net sales $ 20,000,000
Cost of sales 12,000,000
Gross profit $ 8,000,000
Compensation $ 500,000
Selling expenses 750,000
Depreciation and amortization 1,250,000
Other expenses 1,000,000

Total operating expenses 3,500,000

Income from operations $ 4,500,000
Interest and other income 25,000

Income before income taxes $ 4,525,000


You identified the following permanent differences:

Interest income from municipal bonds: $ 10,000
Nondeductible stock compensation: $ 5,000
Domestic production activities deduction: $ 8,000
Nondeductible fines: $ 1,000

TCF prepared the following schedule of temporary differences from the beginning of the year to the end of the year:

Tulip City Flowers Inc.
Temporary Difference Scheduling Template
Taxable
Temporary Differences
BOY
Cumulative
T/D
Beginning
Deferred
Taxes (@ 34%)
Current
Year
Change
EOY
Cumulative
T/D
Ending
Deferred
Taxes (@ 34%)
 
 
 
 
 
 
  Noncurrent
 
 
 
 
 
  Accumulated
  depreciation
(5,000,000)
(1,700,000)
(500,000)
(5,500,000)
(1,870,000)
 
 

Deductible
Temporary Differences
BOY
Cumulative
T/D
Beginning
Deferred
Taxes (@ 34%)
Current
Year
Change
EOY
Cumulative
T/D
Ending
Deferred
Taxes (@ 34%)
 
 
 
 
 
 
  Current
 
 
 
 
 
  Allowance for bad debts
100,000     
34,000         
10,000      
110,000     
37,400       
  Prepaid income
0     
0         
20,000      
20,000     
6,800       
 
 
 
 
 
 
  Total current
100,000     
34,000         
30,000      
130,000     
44,200       
 
 
 
 
 
 
 
 
 
 
 
 
  NonCurrent
 
 
 
 
 
  Deferred compensation
50,000     
17,000         
10,000      
60,000     
20,400       
  Accrued pension liabilities
500,000     
170,000         
100,000      
600,000     
204,000       
 
 
 
 
 
 
  Total noncurrent
550,000     
187,000         
110,000      
660,000     
224,400       
 
 
 
 
 
 
  Total    
650,000     
221,000         
140,000      
790,000     
268,600       


Required:
a. Compute TCF’s current income tax expense or benefit for 2017.

b. Compute TCF’s deferred income tax expense or benefit for 2017.

c. Prepare a reconciliation of TCF’s total income tax provision with its hypothetical income tax expense in both dollars and rates.

d. Assume TCF’s tax rate increased to 35 percent in 2017. Recompute TCF’s deferred income tax expense or benefit for 2017.

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