Advanced Financial Reporting
Project #1 needs to be completed on the Excel file.You need to prepare the 2020 reconciliation etc…. separate from the 20201 reconciliation. Think about preparing your tax return each year. You prepare each year separately. In the real world you would not have the information for 2021 while preparing the 2020 Financial Statement and Tax Return. DO NOT make adjustments to the worksheet provided unless you need to add an additional row (which is not necessary 🙂
1. When completing 2020 you should not have any amounts include which have not already happened. Book income for 2021 is still unknown when working on 2020. Don’t include it.
2. There are other amount which the company plans on in future years but has not happened so you should not include those either.
1. The following information is available for the first three years of operations for Thompson Inc.:
a. Year Earnings Before Tax
b. Depreciation of property, plant and equipment for financial reporting purposes amounts to $60,000 each year for 2020-2022. The company is able to deduct the full cost under the IRS Code Section 179 $180,000 amount allowed for tax purposes in 2020 (note there is no tax depreciation in future years).
c. On October 1, 2020, $360,000 was collected in advance for rental of a building for a two-year period October 1, 2020 – September 30, 2022. The entire $360,000 was reported as taxable income in 2020. The company uses the accrual basis of accounting for financial statement purposes.
d. Thompson Inc. insures the lives of its chief executives every year. The annual payment is $12,000 and this amount is included as an expense on the income statement each year.
e. The company sells its merchandise on an installment contract basis. In 2020, Thompson Inc. reported gross profit of $220,000 tax purposes, and $420,000 for financial statement purposes. This will result in taxable amounts of $100,000 in each of the next two years.
f. Interest recognized on tax-exempt municipal bonds amounts are fixed and will be $20,000 each year in 2020, 2021 and 2022.
g. Warranty expense accrued for financial reporting was $26,000 in 2020. Warranty deductions on the tax returns are $14,000 in 2020, $9,000 in 2021 and $3,000 in 2022.
h. In 2021 Thompson Inc. recorded a $45,000 accrual for litigation liability which will be paid in 2022.
i. The enacted tax rates existing at December 31, 2020 are 30% for 2020 and 34% for 2021 and thereafter.
a. Complete the worksheet provided. It includes the following.
i. Prepare a reconciliation of Book Income to Taxable Income for 2020.
ii. Prepare a schedule of future taxable and (deductible) amounts at the end of 2020.
iii. Prepare a schedule of the deferred tax (asset) and liability at the end of 2020.
iv. Prepare the journal entry to record income tax expense, deferred income taxes, and income tax payable for 2020.
b. Show how the deferred income taxes should be reported on the Balance Sheet at December 31, 2020.
c. Show how the taxes should be reported on the Income Statement at December 31, 2020.
d. Repeat a. to f. above for 2021.
e. Save your solutions as an Excel file (DO NOT use the Cloud version) and upload it on blackboard:
Last name, First name Project #1