Prepare the schedule of year-end deferred tax assets and liabilities for each year. The schedule should separately list the sources of the firm’s ending deferred tax assets and deferred tax liabilities by their source. The total for each schedule should equal the firm’s deferred tax asset and deferred tax liability balance at the end of the year.
Prepare a schedule reconciling the Statutory Tax Rate to the Effective Tax Rate in dollars and percentages.
Determine the amount of current and deferred tax expense for each year.
Assume that during year 2 Congress changes the tax rate from 20% to 25% starting in year 3 and all years thereafter. Recalculate tax expense for year 2 adjusting for the future tax rate increase.
On 1/1/Y1, the firm issued 10,000 nonqualified stock options to employees. The shares are currently trading for $10 per share. The option exercise price is set equal to $10 and the fair value of each option is $3. The vesting service period for the stock options is 18 months. The firm receives a deduction equal to the employee’s gain on the exercise of the option when the option is exercised. At the end of year 2 employees exercised 7,000 options. The fair value of the firm’s stock on this date is $19 per share.

On 1/1/Y1 the firm purchased 1,000 shares of D Corp. for $30 per share. The shares are classified as minority passive investments. Gains/Losses are taxable/deductible when the shares are sold.

On 1/1/Y1 the firm paid a $90,000 premium for a 3-year insurance policy that expires 12/31/Y3. The insurance premiums are deductible when paid.

During Y2, the firm accrued charges of $32,000 that will be deductible when paid in Y3.

Use a domestic (US) tax rate of 20% and a foreign tax rate of 12%. Assume all book/tax Differences relate to domestic taxable income.

Year 1

Year 2

Domestic Earnings before Tax

$600,000

$1,000,000

Foreign earnings before tax

$300,000

$200,000

D. Corp. year-end share price

$20

$24

12/31 balance in unearned revenue (taxable when received)

$400,000

$300,000

Nondeductible Excessive Compensation paid

$50,000

$60,000

Nontaxable Interest Income received

$24,000

$16,000

R&D Tax credit taken

$20,000

$30,000

GAAP Depreciation expense recorded

$100,000

$130,000

Tax deduction for depreciation

$180,000

$220,000