... 1. Describe how you would reconcile the book income to tax income differences for ABC as a corporation and an s-corporation. 2. Make a recommendation for the board of directors about whether or not ABC should become an s-corporation, based on your calculations. (You may present this portion of your essay in memo format if you wish.) For corporations, there is a three step process to reconcile book income to tax income. Usually, corporations keep their accounting records on an accrual basis, which recognizes income when it’s earned, not necessarily when a customer pays for it. Tax returns on the other hand must be completed based on when the income has been received. This may create differences between the general ledger and the tax filing, and must be accounted for. The first step is to total all income items in the current year but not entered into the general ledger. Then add the result to the net income after taxes from the general ledger. Add the current year’s federal tax expense and any capital losses that exceed the corporation’s capital gains. Step two requires the preparer to add any general ledger expenses that are not deductible in the current tax year. Some examples include charitable contribution carryovers from a previous year, nondeductible entertainment and travel expenses, or even timing differences caused by using different depreciation methods on the general ledger and tax return. Finally, subtract tax exempt interest and any other listed income...
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...The Charles H. Kellstadt Graduate School of Business DePaul University FIN 555: Financial Management Thomas M Carroll Phone: 312.362.8826 Office: Loop Campus tcarroll@depaul.edu Case Study Questions Capital Budgeting In Practice Ocean Carriers These questions relate to the Ocean Carriers case in your course packet. You can find the data for this case on the course website in a spreadsheet named: Ocean Carriers Exhibits.xls. This case provides the opportunity to make a capital budgeting decision by using discounted cash flow analysis to make an investment and corporate policy decision. Ocean Carriers is a shipping company evaluating a proposed lease of a ship for a three-year period beginning in 2003. The proposed leasing contract offers very attractive terms, but no ship in Ocean Carrier’s current fleet meets the customer’s requirements. The firm must decide if future expected cash flows warrant the considerable investment in a new ship. 1. Do you expect daily spot hire rates to increase or decrease next year? Give the reasons for your choice. Which are the factors that drive average daily rates? What does this imply in terms of your cash flow projections? Daily hire rates are determined by supply and demand, as well as the size, age, and efficiency of the ships in service. Due to a high number of vessels expected to be delivered in 2001, as well as the fact that imports for iron and coal were expected...
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...actually earned during the period and all of the expenses incurred in order to earn the revenues. The accrual basis of accounting also provides a better picture of a company’s financial position at a moment or point in time. The reason is that all assets that were earned are reported and all liabilities that were incurred will be reported. The accrual basis of accounting is required because of the matching principle. The main difference between accrual and cash basis accounting is the timing of when revenue and expenses are recognized. The cash method is most used by small businesses and for personal finances. The cash method accounts for revenue only when the money is received and for expenses only when the money is paid out. On the other hand, the accrual method accounts for revenue when it is earned and expenses goods and services when they are incurred. The revenue is recorded even if cash has not been recieved or if expenses have been incurred but no cash has been paid. Accrual accounting is the most common method used by businesses. For example:...
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...Intermediate Chapter 19: Accounting for Income Taxes * Temporary Differences – Difference between the tax basis of an asset or liability and its reported amount in the financial statements * Taxable amounts increase taxable income in future years * Deductible amounts decrease taxable income in future years * A deferred tax liability represents the increase in taxes payable in future years as a result of taxable temporary differences existing at the end of the current year * Deferred tax expense is the increase in the deferred tax liability balance from the beginning to the end of the accounting period. * A deferred tax asset is the deferred tax consequence attributable to deductible temporary differences. * In other words, a deferred tax asset represents the increase in taxes refundable (or saved) in future years as a result of deductible temporary differences existing at the end of the current year. * A company should reduce a deferred tax asset by a valuation allowance if it is more likely than not that it will not realize some portion or the entire deferred tax asset. “More likely than not” means a level of likelihood of at least slightly more than 50 percent. * Income tax payable or refundable +/- change in deferred income taxes = total income tax expense or benefit * Taxable temporary differences are temporary differences that will result in taxable amounts in future years when the related assets are recovered. * Deductible temporary...
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...Facts: Books Galore Pty Ltd is an Australian resident company that is a wholesaler of books. They have a large factory based in Sydney with approximately 20 staff. The majority of staff work in sales and in the factory. The information relates 2011/2012 tax year: Item | Amount ($) | Status | Sales (2011/12 tax year) | 2,600,000 | Both on cash and credit | | 2,200,000 | Cash received | | 400,000 | Not received, receivable | Sales (2010/11 tax year) | 180,000 | Cash received | Written off debt (2010/11 tax year) | 20,000 | Bad debt(Because the coaching centre went bankrupt) | Trading stock in 2011/12 tax year Opening stock | $600,000 | Purchases | $4,200,000 | Closing stock | $800,000 | Information related to computer system: Items | Amounts ($) | Time | Install a new computer system | 16,000 | 1st September 2011 | Cost of computers | 14,000 | | Labour | 2,000 | | Disposal of old computers | 2,000 (adjustable value 6,000) | 1st September 2011 | Notes: The new computer system has an effective life of 5 years. The company uses the prime cost method of depreciation. Other deductible expenses: $230,000 (deductible under s 8-1). Issue: Calculate the taxable income of Books Galore Pty Ltd for 2011/12 tax year. Answer: Income in terms of sales: The income for the year would be determined on an accruals basis. The related cases could be Carden’s case, Barratt & Ors v FCT, and J Rowe and Son Pty Ltd v FCT. In Carden’s case, it claims that professional income...
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...Coach | By: Cynthia Cordon | A brief introduction to Coach Company and its financial statements. | 12/17/2014 12/17/2014 Table of Contents Cover Page………… ……………………………………………………………..……………… Coach Symbol…… ……………………………………………………………………………….1 Table of Contents………………………………………………………………………………….2 Introduction to Coach……………………………………………………………………………..3 Coach Financial Statements……………………………………………………………………….4 Summary……………………………………………………………………………..……………5 References…………………………………………………………………………………………7 Coach Coach was originally founded in 1941 as a family-run workshop in Manhattan, New York. It started with six artisans handcrafting a collection of leather goods using their skills that were handed down from their generations. Later, the consumers of the company began to seek out that quality that the Coach craftsmen had. Coach is now expanded, and it continues to maintain the highest standards for materials and workmanship. As of June 2014, there are over 500 Coach Stores in North America, 450 in Asia, and over 25 in Europe. Coach Company also operates in e-commerce websites all over the United States, Canada, Japan, and China. They provide informational websites in over 20 other countries. Coach has built a strong presence globally through Coach Boutiques located in several department stores and in specialty retailer locations in North America and Europe. Coach Company stores are also are located as well as through distributor-operated shops in Asia, Latin America...
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...create either current or future tax deductions * Corporate taxable income formula is relatively straight forward * Accounting Periods and Methods * Corporations measure their taxable income over a tax year and that their tax year must be the same as their financial accounting year * Generally elect their tax year when they file their first tax return * Timing when corps. recognize income and deductions depends on their accounting method * For tax purposes corps. have some flexibility in choosing methods of accounting for individual items or transactions. However, they are generally required to use the accrual method * Corps. with average gross receipts of $5 million or less over the three prior tax years (or a shorter period for new corporations) may use the cash method. LO2 – Computing Corporate Regular Taxable Income * Most corps starts with book income and then make adjustments for book-tax differences to reconcile to the tax numbers. * Privately held corps may use tax accounting rules for book purposes. (No adjustments required) * Book-Tax Differences * Unfavorable book-tax difference – any book-tax difference that requires an add back to book income to compute taxable income. Requires and adjustment that increases taxable income (and taxes payable) relative to book income. * Favorable book-tax difference – Any book-tax difference that requires corporations to subtract the difference from book income in computing taxable...
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...a three-year period beginning in 2003. The proposed leasing contract offers very attractive terms, but no ship in Ocean Carrier’s current fleet meets the customer’s requirements. The firm must decide if future expected cash flows warrant the considerable investment in a new ship. 1. Do you expect daily spot hire rates to increase or decrease next year? Give the reasons for your choice. Which are the factors that drive average daily rates? What does this imply in terms of your cash flow projections? 2. How much is the cost of a new vessel in present value terms? What is the book value of the ship? 3. Should Ms Linn purchase the capesize carrier? Assume that it is going to be sold for scrap after 15 years. [Hint: Construct the Free Cash Flows of the project!] Explain the reason for constructing the free cash flow rather than some other type of cash flow? Assume that the relevant corporate tax rate is 35%. 4. Ms Linn is considering trying to argue that the firm should operate carriers for more than 15 years before selling them for scrap. What would be the optimal number of years to operate the capesize carrier before scrapping it? Assume...
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...uncovered the following problems: 1) On February 28th, 2017 (HW5, #6) Mr.Speakers failed to book sufficient cash, sales tax due, and revenue based on the description of the records of the company. COGS appears to be correct for the transaction. (HINT: Look at the key and recalculate the correct numbers based on the description of the transaction in HW5, some of you may already have the correct numbers calculated in your work, and those of you who were in class know where to find them if you don’t.) 2) Both of the warranty expense/liability journal entries, also made on 2/28/2017, appear to be incorrect as well, based on the company’s transaction records (HW4, 5). 3) These errors also affect the tax calculation for 2017 because of the effects on net income and the fact that warranty expenses are not deductible for tax purposes until actually incurred (remember, we’re only estimating them right now). Requirements: 1) Provide the CORRECT journal entries (what should they have been) for: a. The initial sale and sales tax due. Cash 180978 Revenue 164525 Sales Tax Due 16453 b. The warranty liability estimates. Warranty Expense 2869 Warranty Liability 2869 Warranty Expense 1300 Warranty Liability 1300 c. The tax journal entry. Tax Expense 24440 DTA – ST 12305 DTL – ST 8340 DTL – LT 1278 Income tax Payable 27127 2) Including income tax effects, which income statement and balance sheet accounts were affected by the error and how...
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...Chapter 9 Review: * Contributions to Partnerships §721 * No gain or loss on the exchange * Tax basis in transferred property is carryover basis * Debt Allocation Rules §752 * Liabilities considered contribution of money of the partnership * Decrease in liabilities=distribution §721 does not apply when an incoming partner contributes personal services to a partnership in exchange for ownership interest. Capital interest: ordinary compensation to extent of interest, becomes partner’s initial outside basis (ex. substantial risk of forfeiture) Profits/Losses interest: does not recognize current income because there is no initial liquidation value; initial basis is zero, recognize income to extent of future profits + Original basis of contribution + Additional contributions + Increase in share of liabilities + Distributive share of taxable K income (inc. capital gains) + Distributive share of tax-exempt K income – Distributions of cash and property – Decrease in share of liabilities – Distributive share of nondeductible expenses – Distributive share of losses = Partner’s outside basis for interest §83 election: taxed now instead of when restriction lapses, good if stock price increases Computation of Partnership Taxable Income * Same as individual; Form 1065—ordinary business income or loss * However, must classify income in two groups * Separately stated items: capital gains and losses, §1231...
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...professional responsibilities are as a CPA, and the difference between a review and an audit. Provide draft responses to the above questions. Additionally, provide your manager with a summary of your responsibilities in an internal memo (no more than 1,050 words). 1. The methodology used to determine deferred taxes Because tax reporting and financial reporting are based on two sets of assumptions, they create temporary differences between the amounts reported on the financial statements and income tax statements. A modified cash basis is used for tax reporting and accrual basis is used for financial reporting (Intermediate book, 966). A company will recognized deferred tax assets and liabilities on their balance sheet based on the differences between the financial statement carrying values and the tax basis (Book1,166). Deferred tax asset and deferred tax liability are two different types that result from taxable temporary differences. “A deferred tax liability represents the increase in taxes payable in future years as a result of taxable temporary differences existing at the end of the current year”( Intermediate book, 967). “A deferred tax asset represents the increase in taxes refundable (or saved) in future years as a result of deductible temporary differences...
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...the taxpayer, Ican Wright, protest is hereby made to the adjustments in individual income tax deductions as set forth in March 15, 2010 30-day letter. The following information is submitted in support of this protest. 1. NAME AND ADDRESSES OF TAXPAYER Ican Wright 55555 NE 40th Street Redmond, WA 98051 (555) 555-5555 2. STATEMENT OF APPEAL The taxpayer requests an appeal of the findings of the IRS to the Appeals Office. 3. DATES AND SYMBOLS FROM 30 DAY LETTER Date of Letter: March 15, 2010 Letter 7869 4. TAX PERIOD INVOLVED Ican Wright’s Federal Individual Income Tax Return: 2009 Tax Year 5. ITEMIZED SCHEDULE OF UNAGREED ADJUSTMENTS Increase in adjusted gross income: $15,000.00. 6. STATEMENT OF FACTS The facts relevant to this federal income tax dispute fall into two primary categories: (A) the work-related travel expenses, and (B) the current procedural setting of the case. A. Work-Related Travel Expenses Ican Wright (“Ican”), a Washington state resident is a writer of novels. He has been writing professionally for two years and has published one novel. In 2009 Ican had income of $20,000, which was given to him as an advance on book sales for a novel. In writing the novel Ican spent three months in Florida spending 10 hours a day researching the area. With the receipts in hand he deducted $15,000 as work-related expenses on his tax return. B. Current Procedural Setting of the Case On or about March 15, 2010, Ican...
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...Question 1 Carelessness - Carelessness is the common reasons by which accounting errors may be occur. The person who keeping the books of account must be responsible to his/her job when he/she is careless or not serious may cause such errors happen. Lack of Knowledge - Accounting is based on certain principles and rules. Due to the lack of knowledge of the accounting principles and rules, accounting errors may be occurs. Dishonest of records - If the person who is responsible for keeping books of account is dishonest, he/she may intentionally commit errors in the books of account for the purpose of taking undue advantage. Computer and Software Errors - A professional firm keeps its account records in computer. However, defective computer program and easy access to unauthorized person to the accounting program may also result in the accounting errors. Most of the firm did not update their accounting software may cause many errors in their accounting program. Question 2 Lack of Knowledge - For accountant who is lack of knowledge must take part-time course to update their knowledge which helps in accounting. Besides that, the firm also must providing more training and practice for accountants to update their knowledge and experience to improve their efficiency in his/her job. Carelessness - For person who is newly involved in accounting firm, advice he/she must double check their account works to avoid careless in account records. Senior accountants should...
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...Tamiwe H. Sichinga Book Review The End of Prosperity- Arthur B Laffer, Stephen Moore, and Peter Moore The End of Prosperity is one of most informative book to be read, it has both economic facts, and controversies especially when it come to the country’s economic status --people respond to the incentives. The book or the authors appear to be against the notion of President Obama’s leadership in regards to economic policy. I wouldn’t be surprised if the writers are more republicans than anything else because it appears they glorify Ronald Reagan as the best leader when it came to economic policy. Yes they do mention Bill Clinton but credit appears to be given more to the former.But even though they are against Obama I do support them on the issue of taxes. The book explains in the simplest language about the advantages of lowering taxes. By lowering taxes there is a better chance of increasing the balancing of the budget. The authors strongly warn than tax increments risks the economy resulting in higher employment rates, negative growth and a declining stock market. The book also notes that taxes force businesses to move off-shore to countries like The Netherlands which has conversely low tax rates. This is a very clear explanation even to the common man on the street. It clearly states that keeping businesses at home has a positive effect on both workers and businesses therefore creating better wages and job increments as well as generating more revenues that benefit the...
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...of the company's stock. Porter made a cash tender offer to stockholders. However, Porter did not get enough stock to take over Nicholson. In trying to fight the takeover Nicholson File made several merge overtures to other companies like VLN Corp. A few years back, it had rejected an offer from Cooper Industries. Cooper Industries interest in Nicholson Cooper was interested in Nicholson because of its competitive strength in the hand tools industry. Nicholson had a 50% share for files and wraps with a very strong brand name and high quality line. It also had a 9% share of the 200 million hand saws and saw blades market with excellent brand & quality. It had a very effective and large distribution system across US, Canada and overseas. Cooper industries believed that Nicholson can achieve 6% annual sales growth as also bring down the cost of goods sold from 69% to 65% and selling and administrative expenses from 22% to 19% , thereby increasing its profitability. Cooper would be able to use Nicholson’s distribution system to cross sell Cooper’s hand tool lines in the industrial and consumer markets. Cooper anticipated that the Nicholson acquisition would lessen its earnings volatility and currently Nicholson is in the merger market to stave off the raid by H K Porter Company. 1/5 Valuation of Nicholson File (without merger) Please see Exhibit -1 and Exhibit -3 for details and assumptions Assuming that Cooper will continue to have sales growth equal to 2 % with cost of...
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