Transcript Slide 1

Chapter 8.
Consolidations
and related
topics
C11-Chp-08-1-Consol-Tax-Acctg-2011.PPT
Howard Godfrey, Ph.D., CPA
Professor of Accounting
Copyright Howard Godfrey, 2011.
1
1. Determine whether a group of corporations is a
brother-sister group. (Must rely on code and this pp
file).
2. Income tax for brother-sister group. (Chap 2, Pg. 21)
3. Determine whether a group of corporations are an
affiliated group. (Pg. 8)
4. Determine whether a group of corporations is a parentsubsidiary controlled group. (Pg. 12).
5. Determine whether a group of corps can file a
consolidated return. (Pg. 12)
6. Explain the procedures for making an initial
consolidated return election. (Pg. 13, 18+)
7. What is the matching rule? (Pg. 29)
8. Advantages of a consolidated tax return. (Pg. 15, 31)
9. How are intercompany dividends handled on a
consolidated return?(Pg. 21)
10. What is the amount of the dividend received deduction
if a consolidated return is not filed ? (Pg. 31)
2
What is a controlled
group?
What are tax
consequences of
being a controlled
group? (Sec. 1561, 1563)
3
Controlled Corporations
Sue owns 100% of these corps.
Dream
Magic
Home, Inc.
Lawn, Inc.
Revenue
$800,000 $200,000
Expenses
750,000
170,000
Tax. Income
$50,000
$30,000
Type of controlled group? 1563.
What is combined tax liability?
$12,000 b. $15,000 c. $15,450 4
Dream Total
Allocate Rate
Tax
Layer 1 $50,000 $25,000 15% $3,750
Layer 2 $25,000 $12,500 25% $3,125
Layer 3 $25,000 $12,500 34% $4,250
Total
$50,000
$11,125
Magic
Layer 1 $50,000 $25,000
Layer 2 $25,000 $5,000
Layer 3 $25,000
$0
Total
$30,000
15%
25%
34%
$3,750
$1,250
$0
$5,000
Would you allocate differently?
5
Controlled Groups of Corporations.
Special tax rules apply to corps that are under
common control to prevent them from being used
to avoid taxes that would otherwise be due.
A. Why Special Rules Are Needed. Multiple
corporations could be used to avoid having
corporate income taxed at a 35% rate. The entire
group of corporations must share the benefits of
the progressive tax rate schedule and pay any
surcharge on the combined taxable income of the
group.
B. What Is a Controlled Group? A controlled
group is a group of two or more corporations that
are owned directly or indirectly by the same
shareholder or group of shareholders.
6
Parent-Subsidiary Controlled Groups.
A parent-subsidiary controlled group is a group
of two or more corporations where one
corporation (the parent) owns directly at least
80% of the voting power of all classes of voting
stock, or 80% of the total value of all classes of
stock of a second corporation. There can be
more than one subsidiary in the group. If the
parent and/or a subsidiary own in total 80% of
the voting power of all classes of voting stock,
or 80% of the total value of all classes of stock
of another corporation, that corporation is
included in the controlled group.
7
Determine whether
a group of
corporations is a
brother-sister group.
8
Brother-Sister Controlled Groups.
A group of two or more corporations is a brothersister controlled group if five or fewer individuals,
trusts, or estates own (1) At least 80% of the
voting power of all classes of voting stock (or at
least 80% of the total value of the outstanding
stock) of each corporation, and
(2) more than 50% of the voting power of all
classes of stock (or more than 50% of the total
value of the outstanding stock) of each
corporation, taking into account only the stock
ownership that each person has that is common
with respect to each corporation.
A shareholder's common ownership is the
percentage of stock the shareholder owns that is
common or identical in each of the corporations.
9
Brother-Sister Controlled Groups.
A second definition of a brother-sister
group is a broader definition.
Under the 50% definition, five or fewer
shareholders must satisfy only the
50% common ownership test
described above.
Where the 50% only definition applies,
more corporations may be pulled into
the controlled group than under the
50%-80% definition.
10
Controlled groups must apportion lower
tax rates to members of group
Parent-subsidiary group – 2 or more
corporations with a common parent
–Parent directly owns 80% of stock of at least
one sub.
–80% or more of stock of additional subs must
be jointly or separately owned of all other
corporations by parent and subsidiaries
Brother-sister group
–2 or more corps have 80% of more of each
corp’s stock owned by 5 or few individuals
and sum of lowest common ownership of
each shareholder is 50% or more.
11
Brother-Sister-AJCA-1
Unrelated Individuals A, B, C and
D own some corporations in the
percentages listed on the next
slide.
Each corporation has taxable
income of $50,000.
How is the income tax computed
for each corporation?
12
Brother-Sister Controlled Groups
Identify brother-sister corps given the
individual ownership percentages.
Corporations
Owners
James
Carol
Joan
Wallace
A
20%
25%
20%
10%
B
40%
10%
40%
10%
C
15%
20%
40%
20%
D
15%
20%
20%
25%
Total
13
Brother-Sister Controlled Groups
Identify brother-sister corps given the
individual ownership percentages.
Corporations
Owners
James
Carol
Joan
Wallace
Total
A
20%
25%
20%
10%
75%
B
40%
10%
40%
10%
100%
C
15%
20%
40%
20%
95%
D
15%
20%
20%
25%
80%
15%
10%
20%
10%
55%
14
In preceding slide, Corps B, C,
and D meet both the 80% test
and the 50% test under old law.
Current law (e.g. tax rates)
eliminates the 80% test for
many purposes.
See Corp. A on preceding slide.
Sec. 1563(a)(2) vs. 1563(f)(5)
15
Ownership by A, B, C, & D
They are individual stockholders
Which are in a controlled group?
Crp-1 Crp-2 Crp-3 Crp-4 50%
A
20% 10%
5% 60%
B
10% 20% 60%
5%
C
10% 70% 35% 25%
D
60%
10%
80% 100% 100% 100% 100%
16
Ownership by A, B, C, & D
They are individual stockholders
Which are in a controlled group?
Crp-1 Crp-2 Crp-3 Crp-4 50%
A
20% 10%
5% 60% 5%
B
10% 20% 60%
5% 5%
C
10% 70% 35% 25% 10%
D
60%
10%
80% 100% 100% 100% 100% 20%
17
Brother-Sister-AJCA-3
A brother-sister controlled group
means two or more corporations if
five or fewer persons who are
individuals, estates or trusts own (or
constructively own) stock possessing
(1) at least 80 percent of the total
combined voting power of all classes
of stock entitled to vote and at least
80 percent of the total value of all
stock, and…
18
Brother-Sister-AJCA-4
(2) more than 50 percent of percent of
the total combined voting power of all
classes of stock entitled to vote or
more than 50 percent of the total
value of all stock, taking into account
the stock ownership of each person
only to the extent the stock ownership
is identical with respect to each
corporation.
19
Brother-Sister-AJCA-5 – Reasons…
Committee is concerned that taxpayers
may be able to obtain benefits, such as
multiple lower-bracket corporate tax rates,
through the use of corporations that are
effectively under common control even
though the 80% test of present law is not
satisfied. Committee believes it is
appropriate to eliminate the 80% test for
purposes of the currently effective
provisions under sec. 1561 (corporate tax
brackets, the accumulated earnings credit,
and the minimum tax.)
20
Brother-Sister-AJCA-6
Explanation of Provision
Under the provision, a brother-sister controlled
group means two or more corporations if five or
fewer persons who are individuals, estates or
trusts own (or constructively own) stock
possessing more than 50 percent of the total
combined voting power of all classes of stock
entitled to vote, or more than 50 percent of the
total value of all stock, taking into account the
stock ownership of each person only to the
extent the stock ownership is identical with
respect to each corporation.
21
Brother-Sister-AJCA-7
Explanation of Provision
The provision applies only for purposes of
section 1561, currently relating to
corporate tax brackets, the accumulated
earnings credit, and the minimum tax.
The provision does not affect other Code
sections or other provisions that utilize or
refer to the section 1563 brother-sister
corporation controlled group test for other
purposes.
22
Ms. Investor owns all of the
stock of four corporations.
Each corp. has taxable
income of $25,000 per year.
How much is the total tax
for all four corps each year?
a. $15,000
b. $22,250
c. $34,000
d. $25,000
23
Election to Allocate Reduced Tax Rates.
A controlled group may elect to apportion
the tax benefits of the 15%, 25% and 34%
tax rates to the member corporations in
any manner that it chooses.
If no special apportionment plan is elected,
the $50,000, $25,000, and $9,925,000
amounts allocated to the 15%, 25%, and
34% tax rate brackets are divided equally
among all the corporations in the group.
24
Ms. Investor owns all of the
stock of Corp A and Corp B.
Corp A has taxable income
of $50,000. Corp B has
taxable income of zero.
There is no election under
Sec. 1561.
What is the total tax for
both corporations?
a. $7,500
b. $10,000
25
Combined Controlled Groups.
A controlled group is a group of
three or more corporations that
are members of the above
groups where one is a parent
corporation of a parentsubsidiary controlled group and
a member of a brother-sister
controlled group.
26
Determine whether
a group of corps
can file a
consolidated return.
Pg. 12
27
Source of Consolidated Return Rules
Code Secs. 1501 through 1504 are
the primary statutory provisions
governing the filing of consolidated
tax returns.
The statute is very general and
primarily defines the composition of
affiliated groups that are eligible to
elect to file a consolidated tax return.
Regulations provide the guidance
needed to file consolidated tax
returns.
28
II. Definition of an Affiliated Group
1. Only an affiliated group of corporations can
elect to file a consolidated return.
Stock ownership requirements are:
(1) a parent must directly own stock having at
least 80% of the total voting power of all
classes of stock entitled to vote and at least
80% of the total value of all outstanding stock
in at least one includible corporation;
(2) for each other corp eligible to be included in
the affiliated group, stock having at least 80%
of the total voting power of all classes of stock
entitled to vote and at least 80% of the total
value of all outstanding stock must be owned
directly by the parent & other group members
29
Parent
Owns 90%
Sub-1
Owns 70%
Sub-2
30
Parent
Owns
30%
Owns 90%
Sub-1
Owns 70%
Sub-2
31
Corporations A, B, and C each
have only one class of stock.
Ownership is as follows
Corporations
Shareholders
Corp. A Corp. B Corp. C
Mr. Jones
60%
40%
Ms. Hill
40%
60%
Corp. B
80%
100%
100%
80%
Which corporations are Brother-Sister?
How many are in a controlled Group?
32
Comparison with Controlled Group Definition.
There are three types of controlled groups:
brother-sister groups, parent-subsidiary groups,
and combined groups
Brother-sister groups cannot file a consolidated
tax return. Parent-subsidiary groups and the
parent-subsidiary portion of combined controlled
group can elect to file a consolidated tax return.
Difference Between Definitions. Only affiliated
groups can elect to file consolidated tax returns.
Four differences between the definitions of Sec.
1504 and Sec. 1563 (parent-sub controlled group)
do exist. These differences cause some members
of a controlled group to be excluded from the
affiliated group.
33
Consolidated Tax Returns.
Most parent-subsidiary controlled groups
are eligible to file a consolidated return. An
election is made to file a consolidated tax
return by combining all of the income and
expenses of each member on a Form 1120.
Each corporate member of the affiliated
group must consent to the election.
For brother-sister corporations, the broader
50% only definition applies for limiting the
reduced tax rates.
34
Advantages of
Consolidations
What advantages to you
see on the next slide for
filing a consolidated
income tax return?
35
Advantages of Consolidations
Parent
Sub.
Sales
$900,000
$600,000
Cost of Sales
(400,000)
(400,000)
500,000
200,000
Operating Exp.
(300,000)
(100,000)
Net Op. Income
200,000
100,000
Gross Profit
Char. Cont.-Actual
($40,000)
36
Consolidated Returns
Affiliated group – parent corporation must
own directly 80% or more of subsidiary’s
stock (by voting and value)
– Can include more than 2 corporations if
80% of stock owned by one or more
corporations that are part of
affiliated group
Consolidated return reports combined
results of operations of all corporations in
the group
– All subs must consent and must have or
change to same tax year as parent.
37
Consolidated Net Income
Affiliated corporations viewed as
divisions of parent requiring modification
for deferred intercompany transactions
and intercompany dividends
Items subject to limitations and netting are
determined on a consolidated basis.
–Capital gains and losses
–Section 1231 gains and losses
–Charitable contributions deductions
38
Consolidated Tax Returns
Advantages
–Intercompany dividends are
eliminated from gross income
–Gains on intercompany
transactions are eliminated
–Deductions subject to
limitation may be allowed
when consolidated
39
Consol. Returns Advantages- Cont’d
–Losses of one corporation can
offset gains of another
–Income from one corporation
can offset losses of another
–Limitations based on
consolidated income permit
greater use of deductions or
credits
40
Advantages of Consolidated Tax Return
Parent
Sub
Sales
$900,000
$600,000
Cost of Sales
(400,000)
(400,000)
500,000
200,000
Operating Exp.
(300,000)
(100,000)
Net Op. Income
200,000
Gross Profit
Char. Cont.-Actual
Total
100,000 300,000
(40,000)
What is Charitable Cont. Ded on separate return?
What is Charitable Cont. Ded on consol. return?
41
Advantages of Consolidated Tax Return
Parent
Sub
Sales
$900,000
$600,000
Cost of Sales
(400,000)
(400,000)
500,000
200,000
Operating Exp.
(300,000)
(300,000)
Net Op. Income
200,000
(100,000)
Char. Cont.-Actual
(40,000)
Gross Profit
Total
100,000
What is Charitable Cont. Ded on separate return?
What is Charitable Cont. Ded on consol. return?
42
Compute Consolidated Taxable Income
Parent
Gross Income-Sales
300,000
Sub
200,000
Interest income
17,000
MACRS Deprec.
(22,000)
(5,000)
(200,000)
(203,000)
Other Op. Expenses
Sec. 1231 gain
70,000
Capital Loss
Subtotal
Consol.
(80,000)
165,000
(88,000)
77,000
Consol. Tax Inc.
What is consolidated taxable income
a. $77,000 b. $87,000 c. $95,000 d. $165,000
43
Intercompany Transactions
An intercompany transaction takes place during a
consolidated return year between corporations that
are members of the same group immediately after
the transaction.
Property Transactions.
In general, gains and losses on intercompany
transactions involving the sale or exchange of
property between two group members are
recognized in calculating the group member's
separate taxable income.
Recognized gain or loss (an intercompany item) is
deferred until a corresponding item Corresponding
items that can trigger the recognition of an
intercompany item include sale of the property
outside the group.
44
Intercompany Transactions - Parent-Sub.
2005 Pcorp bought land at a cost of
$70
2006 Pcorp sells the land to Scorp for
$100
2007 Scorp sells the land to Outsider for
$110
How are gains reported after Consolidation Adj.
2006
2007
Pcorp
S Corp
Pcorp
S Corp
a
$30
$10
b
$30
$10
c
$40
$40
d
See Reg. 1.1502-13
45
Intercompany Transactions - Parent-Sub.
2005 Pcorp bought land at a cost of
$70
2006 Pcorp sells the land to Scorp for
$100
2007 Scorp sells the land to Outsider for
$90
How are the gains reported after Consolidation Adj.
2006
2007
Pcorp
S Corp
Pcorp
S Corp
a
$30
($10)
b
$30
($10)
c
$20
d
$20
See Reg. 1.1502-13
46
Remainder of this file is
optional review of some
important concepts
already covered in this
course- concepts that
often are now well
understood
47
Reconciling taxable
income and book
income.
Also, accounting for
income taxes.
48
An accrual basis Big Manufacturing Corporation
had federal taxable income of $20,000 during its
first year of operations.
In the computation of taxable income, the
corporation made the appropriate adjustment
related to its total entertainment expense of
$2,000 for the year.
Big is subject to the normal tax rates applicable
to corporations, and does not qualify for credits.
Do not consider any penalty for underpayment of
estimated tax.
What is the balance to be shown on line 8
of Schedule M-2 on Form 1120?
a. $19,000 b. $18,000 c. $17,000 d. $16,000
e. None of these
49
Big Manufacturing Corp.
See Preceding Slide
Book Income
??
Ent. Exp. Adj.
??
Taxable Income $20,000
Tax
??
End. Ret. Earn.
??
50
Big Manufacturing Corp.
See Preceding Slide
Book Income
$19,000
Ent. Exp. Adj.
1,000
Taxable Income 20,000
Tax
3,000
End. Ret. Earn. $16,000
51
For its year ending 12-31, 2006, AB-Inc.Reported:
Amount Tax. Income
Book income before tax
$ 100,000 $ 100,000
Included in this $100,000 were:
Provision for state income tax
1,000
Interest on U.S. Bonds
6,000
Interest exp. on bank loan
buy U.S. Treasury Bonds
2,000
AB's taxable income for 2006
a. $96,000 b. $ 97,000 c. $100,000 d. $101,000 (CPA-90)
52
For its year ending 12-31, 2006, AB-Inc.Reported:
Amount Tax. Income
Book income before tax
$100,000
$100,000
Included in this $100,000:
Provision for state income tax
$1,000
Interest on U.S. Bonds
$6,000
Interest exp. on bank loan
buy U.S. Treasury Bonds
AB's taxable income for 2006
$2,000
$100,000
a. $96,000 b. $ 97,000 c. $100,000 d. $101,000 (CPA-90)
53
For its year ending 12-31, 2006, Bard-Inc. Reported:
Info.
Book income before tax
Tax
$ 450,000 $ 450,000
Included in this $100,000 were:
State corp. income tax refunds
4,000
Life insurance - officer's death
15,000
Loss-stock bought for
investment in 1997
(20,000)
Bard's taxable income for 2006
a. $435,000 b. $451,000 c.$455,000 d.$470,000 (CPA-87)
54
For its year ending 12-31, 2006, Bard-Inc. Reported:
Info.
Book income before tax
Tax
$ 450,000 $ 450,000
Included in this $100,000 were:
State corp. income tax refunds
4,000
Life insurance - officer's death
15,000
(15,000)
(20,000)
20,000
Loss-stock bought for
investment in 1997
Bard's taxable income for 2006
$ 455,000
a. $435,000 b. $451,000 c.$455,000 d.$470,000 (CPA-87)
55
Goals: GAAP vs. Income Tax.
GAAP
Tax Return
Revenue
Recognize
this year
Recognize
later
Expenses
Recognize
later
Recognize
this year
56
Net income per books is as follows:
GAAP Fin. Reports
2007
2008
Revenue
$800,000
$900,000
Expenses
600,000
700,000
Net Income
$200,000
$200,000
Tax Expense-25%
Company defers reporting revenue of
$200,000 until 2008 on tax return.
2007
2008
Tax Return
Revenue
$600,000 $1,100,000
Expenses
600,000
700,000
Net Income
$0
$400,000
Tax Payable
57
Net income per books is as follows:
GAAP Fin. Reports
2007
2008
Revenue
$800,000
$900,000
Expenses
600,000
700,000
Net Income
$200,000
$200,000
Tax Expense-25%
$50,000
$50,000
Company defers reporting revenue of
$200,000 until 2008 on tax return.
2007
2008
Tax Return
Revenue
$600,000 $1,100,000
Expenses
600,000
700,000
Net Income
$0
$400,000
Tax Payable
$0
$100,000
58
Enter Amounts for preceding slide
Accounts
Tax expense
Deferred tax
Tax payable
2007
50,000
2008
50,000
50,000 50,000
100,000
59
Tax Allocation Concepts
Deferred tax asset
A deferred tax asset is the increase in
tax refund or savings in future years as
a result of deductible temporary differences
existing at the end of the current year.
Deferred tax liability
Amount that is recognized for deferred tax
consequences of temporary differences that
will result in taxable amounts in future years.
60
Sales Co. (Co. started in 2005) [1]
Bad Debts. Direct write-off for Tax Purposes
Amounts in
2005
2006
$Thousands
GAAP Tax GAAP Tax
Sales
$800 $800 $800 $800
Cost of Sales
500 500
500
500
Gross Margin
300 300
300
300
Bad Debts Expense
80
60
50
60
Total other expenses
100 100
120
120
Net Income Before Tax $120 $140 $130 $120
Amount of the deferred tax asset at 12-31-06?
Assume income tax rate is 34%
61
Sales Co. [2]
Book
Income
$120,000
130,000
250,000
Year
2005
2006
Total
Difference
Marginal rate
Deferred Tax Asset
Taxable
Income
$140,000
120,000
260,000
10,000
34%
$3,400
Realty Corp. Rental Income-Slide 1
Realty Co. was organized on Jan-1, year 1.
Realty bought a building on that date for
$400,000, having an estimated 40-year life
with no salvage. The S/L depreciation
method is used for tax & GAAP.
Depreciation is $10,000 per year on the tax
return and in the GAAP statements.
Realty rented the building to IBM for 2
years at $20,000 per year. Rent of $40,000
was received on Jan-1, year 1. Realty’s
income tax rate is 40%. Year 1 operations
are described on the next slide.
Realty Corporation - Slide 2
GAAP
Tax
Rent Revenue
$20,000
Cash Expenses
(5,000)
Depreciation Exp.
(10,000)
NIBT/Taxable Income
5,000
Income Tax Rate
40%
Income Tax Expense
Income Tax Paid
Net Income
What is the amount of the deferred tax
asset or liability at end of Yr 1?
Realty Corporation - Slide 3
GAAP
Tax
Rent Revenue
$20,000
$40,000
Cash Expenses
(5,000)
(5,000)
Depreciation Exp.
(10,000)
(10,000)
NIBT/Taxable Income
5,000
25,000
Income Tax Rate
40%
40%
Income Tax Expense
2,000
Income Tax Paid
10,000
Net Income
$3,000
What is the amount of the deferred tax
asset or liability at end of Yr 1?
Realty Corporation - Slide 4
GAAP
Tax
Rent Revenue
$20,000
$40,000
Cash Expenses
(5,000)
(5,000)
Depreciation Exp.
(10,000)
(10,000)
NIBT/Taxable Income
5,000
25,000
Income Tax Rate
40%
40%
Income Tax Expense
2,000
Income Tax Paid
10,000
Net Income
$3,000
What is the amount of the deferred tax
asset or liability at end of Yr 1?
8,000
Turtle Co. Slide 1 of 3
Turtle Co. bought equipment on Jan-1
year 1, for $50,000. The equipment
had an estimated 5-year service life
and no expected salvage value.
Turtle uses the 200% double-declining
depreciation method.
What is accumulated depreciation at
the end of year 2?
a. $30,000 b. $32,000
c. $39,200 d. $42,000
67
Turtle Co. Tax Accounting. [2 of 3]
Begin.
Book
Year Value
Tax
Deprec.
Exp.
GAAP
Deprec.
Exp.
Income Income
Excess
Tax
Tax
Deprec. Rate Benefit
Yr. 1
50,000
20,000
10,000
10,000
30%
3,000
Yr. 2
30,000
12,000
10,000
2,000
30%
600
Assume 30% income tax rate. Complete for Year 1.
GAAP Expenses including depreciation total $60,000.
GAAP
Tax
Revenue
$100,000 Revenue
$100,000
Expenses
60,000 Expenses
Net Income before Tax
$40,000 Taxable Income
Income Tax Expense
Tax Due
Net Income
What is the deferred tax liability at the end of year 1?
Answer?
68
Turtle Co. Tax Accounting. [3 of 3]
Begin.
Book
Year Value
Tax
Deprec.
Exp.
GAAP
Deprec.
Exp.
Income Income
Excess
Tax
Tax
Deprec. Rate Benefit
Yr. 1
50,000
20,000
10,000
10,000
30%
3,000
Yr. 2
30,000
12,000
10,000
2,000
30%
600
Assume 30% income tax rate. Complete for Year 1.
GAAP Expenses including depreciation total $60,000.
GAAP
Tax
Revenue
$100,000 Revenue
$100,000
Expenses
60,000 Expenses
70,000
Net Income before Tax
$40,000 Taxable Income $30,000
Income Tax Expense
$12,000 Tax Due
$9,000
Net Income
$28,000
What is the deferred tax liability at the end of year 1?
Answer?
$3,000
69
Bug Co. Unearned Revenue [1 of 4]
Bug Co. will provide services to a
customer over an 18-month period
beginning 12-1-06. Customer will
receive same service each month.
Bug receives full $36,000 contract
price 12-1-06. This collection is recorded
as unearned income. Please enter this in
the accounts on the next slide and in the
T Accounts on the next following slide.
How is this reported on Fin. Statements?
Bug. Co. Unearned Rev. [2 of 4]
Journal Entries in December 2006
12-1 Cash
Unearned Revenue
12-31
Unearned Revenue
Earned Revenue
Balance Sheet - 12-31-06
Liabilities - Current
Unearned revenue
Liabilities - Non-Current
Unearned revenue
Bug Co. Unearned Rev. [3 of 4]
Journal Entries in December 2006
12-1 Cash
36,000
Unearned Revenue
36,000
12-31
Unearned Revenue
Earned Revenue
2,000
2,000
Balance Sheet - 12-31-06
Liabilities - Current
Unearned revenue
Liabilities - Non-Current
Unearned revenue
24,000
10,000
Bug Co. Unearned Rev. [4 of 4]
Cash
12-1
Other Assets
36,000
Accounts Payable
Unearned Revenue
12-31
2,000
12-1
Revenue and Expense
Revenue Earned
12-31 2,000
Expenses
36,000
See previous & following Bug Co. Slides
Assuming the company starts operations
on 12-1-06. The company had no revenue
other than the revenue from this contract.
The company has expenses of only $1,000
in December, 2006.
What will the income statement look like?
What will the company report as taxable
income. (All income received in advance is
generally subject to tax when received.)
(40% tax bracket)
Bug Company
GAAP TAX
Revenue
$2,000 $36,000
Expenses
1,000
1,000
Net Income
1,000
Taxable Income
$35,000
Income Tax Exp.
$400
Income Tax Liab.
$14,000
Bug will show tax expense of $400
but will pay income tax of $14,000
The difference is a tax asset.
Bug Company
Record Income Tax Expense
Income Tax Expense
400
Deferred Income Tax
13,600
Income Tax Payable
14,000
Pay Income Tax
Income Tax Payable
Cash
14,000
14,000
The
End
77