Yellow Corporation has the following preliminary trial balance, before recording the tax provision.
2019 2020
Cash $ 170,300 $ 185,750
Accounts Receivable 153,000 540,000
Allowance for bad debts (12,000) (17,500)
Fixed Assets 850,000 950,000
Accumulated Depreciation (200,000) (350,000)
Deferred Tax Asset
Accounts Payable (654,100) (434,550)
Accrued Vacation (30,000) (10,500)
Incentive Bonus Payable (80,000) (80,000)
Accrued Payroll (25,000) (34,000)
Income Taxes Payable (2,000) (20,000)
Deferred Tax Liability (35,285) (35,285)
APIC (60,000) (87,000)
Common Stock (10,000) (10,000)
Retained Earnings (64,915) (64,915)
Revenue (3,360,700)
Payroll Expense 450,000
Purchases 110,000
Insurance 350,000
Officers Life insurance 2,700
Payroll Taxes 450,000
Bad Debt Expense 9,500
Travel 50,000
Meals and Entertainment 60,000
Rent 650,000
Office Supplies 600
Depreciation 150,000
Marketing Costs 125,000
Other Expenses 350,000
Penalties 8,000
Interest Income (3,100)
Interest Expense 48,000
Income tax Expense 18,000
Other facts for Yellow Corporation:
- The federal statutory income tax rate is 21% for both years.
- Yellow Corporation operates in multiple states. The weighted average statutory state income tax rate is 7% for both years.
- Book income including preliminary income tax expense of $18,000 is $532,000.
- Tax depreciation for the year ended 2020 is $500,000.
- Yellow Corporation's cost basis in fixed assets for book and tax is the same.
- Yellow Corporation's pre-tax temporary difference in fixed assets at year-end 2019 was $175,000 book>tax basis.
- None of Yellow Corporation's 2019 vacation accrual was paid within the first 2.5 months of 2020, and none of the 2020 vacation accrual is expected to be paid in the first 2.5 months of 2021.
- All of Yellow Corporation’s 2019 bonuses and payroll were paid out within the first 2.5 months of 2020, and Yellow Corporation's expectation is to do this again in 2021.
- Yellow Corporation is the beneficiary of the officers' life insurance contract(s).
- Interest income is from other than municipal bonds, so is taxable.
REQUIREMENTS: Using the trial balance and the above information, complete the following. (NOTE: Show your work and calculation process for each of the question)
1. Compute 2020 federal taxable income.
2. Compute the state statutory income tax rate net of the federal benefit.
(State statutory rate net of federal benefit to four decimal places, e.g. .2111)
3. Calculate the total 2020 current income tax provision.
(Total current income tax expense is ________)
4. Prepare an inventory of deferreds using the template below.
Inventory of Deferreds
Pre-tax 2019 Current Activity Pre-tax 2020 Tax-effected 2020
Insert temp differences here
Total pre-tax
Tax Rate
Total tax-effected
Tax-effected DTL balance at 12/31/20 is _________
5. Compute the total 2020 deferred income tax provision. (Deferred income tax expense)
6. Compute the 2020 effective tax rate
(Effective tax rate to four decimal places, e.g. .2111)
7. Prepare a 2020 effective tax rate reconciliation using the template below：
Effective Tax Rate Reconciliation
Yellow
Pre-tax Tax-effected
Pretax book income
State income tax expense
Permanent differences
Tax expense
Total income tax expense is _________
