Question

You have been assigned to compute the income tax provision for Motown Memories Inc. (MM) as of December 31, 2018. The company’s income statement for 2018 is provided below:

Net sales	$	50,000,000
Cost of sales		28,000,000
Gross profit	$	22,000,000
Compensation	$	2,000,000
Selling expenses		1,500,000
Depreciation and amortization		4,000,000
Other expenses		500,000
Total operating expenses	$	8,000,000
Income from operations	$	14,000,000
Interest and other income		1,000,000
Income before income taxes	$	15,000,000

permanent differences:

Interest income from municipal bonds	$	50,000
Nondeductible meals	$	20,000
Nondeductible fines	$	5,000

MM prepared the following schedule of temporary differences from the beginning of the year to the end of the year:

Complete this question by entering your answers in the tabs below.

a. Compute MM’s current income tax expense or benefit for 2018.
b. Compute MM’s total income tax provision for 2018.

a.
b.	Total income tax provision

Prepare a reconciliation of MM’s total income tax provision with its hypothetical income tax expense of 21% in both dollars and rates.

Reconciliation of Effective Tax Rate	Dollars	Percent
Tax provision before adjustments			%
Interest from municipal bonds			%
Nondeductible meals			%
Nondeductible fines			%
Income tax provision			%

Answer 1

1. Total income tax provision for FY 2017-18 is

Income before income taxes $ 15,000,000

less: Interest income $ 50,000

Add: Non deductible meals $ 20,000

Add: Non deductible fines $ 5,000

Total income before taxes after ajustments $ 14,975,000   

Income tax provision = $ 14,975,000*21%

= $ 3,144,750

2. Reconcilation of MM's total income tax provision

Reconcilation	Dollars	Percent
Tax provision before adjustments($ 15,000,000*21%)	$ 3,150,000	21%
Interest fro municipal bonds	$ 50,000
Non deductible meals	$ 20,000
Non dedutible fine	$ 5,000
Income Tax provision($3150000-50000+20000+5000)*21/100	$ 656,250