qualified stock option book asc 718 expense 750 B u s i n e s s F i n a n c e

Final Exam Review

Your final exam will be on the December 14^th this is one of the review problems

Problem

As of 12/31/19 (the first year of operation), you have been provided the following information regarding WC Corporation:

Pre-Tax Income (Loss) for FY19 ($4,500,000)

Accrued Vacation (estimated $1,200,000 paid by 3/15/20) 2,900,000

Meals expense (prior to 50% limitation) 750,000

Tax exempt interest income (for fed and state purposes) 450,000

Tax depreciation 1,850,000

Book depreciation 1,400,000

Inventory reserve at 12/31/19 1,650,000

CY Incentive Stock Option ASC 718 Expense 400,000

CY Non-Qualified Stock Option Book ASC 718 Expense 750,000

Federal R&D credit generated (tax return basis) 500,000

Federal R&D credit on a more likely than not basis 400,000

State A R&D credit generated on a more likely than not basis 100,000

Federal Statutory tax rate is 21%

State A – Statutory tax rate is 10% (assume 100% apportionment in State A)

The Company is on the current method of deducting state taxes.

Assume no valuation allowance is required due to existing backlog for 2020 sales.

Assume federal and state R&D credits are not refundable and can carryover for 20 years.

a) Calculate WC Corporation’s federal and state current year payable as of 12/31/19 and prepare the journal entry for recording the federal and state current year payable.

b) Calculate WC Corporation’s federal and state deferred tax assets and liabilities as of 12/31/19 and prepare the journal entry for recording the federal and state deferred tax assets and liabilities. (

c) Prepare the Journal Entry to record the UTB Liability.

d) Calculate the total income tax expense (think formula to remember = current + deferred + noncurrent expense) and then prepare the effective rate reconciliation for the year ended 12/31/19.

During 2020, the following events occurred:

• Upon filing the tax return, there were adjustments to the 2019 amounts as follows:
  • Accrued vacation paid by 3/15/20 changed from $1,200,000 to $500,000
  • Actual Meals expense (before 50% limitation) was $980,000 instead of $750,000

Additionally, the following events occurred in 2020:

• WC Corporation had pre-tax income for FY20 of $12,500,000.

• WC Corporation incurred $700,000 of meals expenses (before 50% limitation).
• Tax depreciation exceeded book depreciation by $360,000. The cumulative tax over book depreciation as of 12/31/2020 is $810,000.
• CY Incentive Stock Option ASC 718 Expense was $650,000
• CY Incentive Stock Option Tax Deduction was $420,000
• CY Non-Qualified Stock Option Book ASC 718 expense was $950,000
• CY Non-Qualified Stock Option Tax Deduction was $850,000 (which relates to the 2019 ASC718 book expense of $750,000)
• WC Corporation paid the remaining balance of the accrued vacation accrued at 12/31/19 on 12/1/20. As of 12/31/20, WC Corporation had accrued $3,250,000 of vacation, which it did not expect to payout before 3/15/19.
• Inventory reserve of $1,250,000 as of 12/31/20.
• Federal R&D credit generated in 2020 of $650,000 of which $450,000 is the more likely than not credit amount.
• State A R&D credit generated in 2020 of $150,000 (all more-likely-than-not)

State A – Statutory tax rate is 10% (apportionment is 70%)

State B – Statutory tax rate is 8% (apportionment is 30%)

The Company is on the current method of deducting state taxes.

Assume no valuation allowance.

Assume no limitation on the usage of R&D credits against federal and state taxes.

e) Calculate and prepare the journal entry for recording the federal and state return to provision true-ups (consider both current and deferred changes) for 12/31/19. (4 points)

f) Calculate the federal and state current payable for 12/31/20, assume all 12/31/19 taxes have been paid (i.e. what is the tax payable balance as of the end of 2019?) and prepare the journal entry for recording the federal and state 2020 payable.

g) Calculate federal and state deferred tax liabilities and assets as of 12/31/20 and prepare the journal entry for recording the 2020 federal and state deferred tax assets and liabilities.

h) Prepare the Journal Entry to record the UTB Liability.

i) Calculate the total income tax expense (current + deferred + noncurrent expense) and then prepare the effective rate reconciliation for the year ended 12/31/20.

j) Prepare the tax accounts using Debits and Credits (Hint: refer to your journal entries). All of the federal and state taxes payable is paid upon the filing of the 2019 federal and state tax returns. Please use debit (credit) format below:

	Federal Current Taxes Payable	State Current Taxes Payable	Total Noncurrent Taxes Payable	Total Federal & State Deferred Tax Asset/(Liability)	Federal Income Tax Provision	State Income Tax Provision	Cash	Total (should be zero)
Beg. Balance at 1/1/2019	N/A	N/A		N/A	N/A	N/A	N/A
Ending Balance at 12/31/2019
Revised Balance at 12/31/2019 (Tax Return)
Ending Balance at 12/31/2020