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:
Cost of goods sold (22,000,000)
Gross profit $11,000,000
Dividend income 55,000
Tax-exempt interest income 15,000
Total income $11,070,000
Depreciation $ 800,000
Bad debts 625,000
Charitable contributions 40,000
Meals and entertainment 60,000
Total expenses (6,655,000)
Net income before federal income taxes 4,415,000
Cash $ 2,125,000
Accounts receivable $ 3,300,000
Allowance for doubtful accounts (450,000) 2,850,000
Fixed assets $10,000,000
Accumulated depreciation (1,600,000) 8,400,000
Investment in corporate stock 1,000,000
Investment in tax-exempt bonds 50,000
Total assets $20,425,000
Accounts payable $ 2,120,000
Long-term debt 8,500,000
Common stock 6,000,000
Retained earnings 3,805,000
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 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.