Reference no: EM132945039
Question 1 - Micro, an accrual basis corporation, reported $526,100 net income before tax on its financial statements prepared in accordance with GAAP. Micro's records reveal the following information:
Micro paid $29,200 in legal fees and $56,000 to a former employee to settle a claim of sexual harassment. To avoid negative publicity, Micro insisted that the settlement include a confidentiality agreement.
Late in the year, Micro entered into a five-year licensing agreement with an unrelated firm. The agreement entitles the firm to use a Micro trade name in marketing its own product. In return, the firm will pay Micro an annual royalty of 1 percent of gross revenues from sales of the product. The firm paid a $82,000 advanced royalty to Micro on the day the agreement was finalized. For financial statement purposes, this prepayment was credited to an unearned revenue account.
In December of the current year, Micro received a $9,200 advance payment on rental income from a tenant to whom Micro sublets some of its unused office space. The payment relates to use of the rented space in January and February of the coming year. For financial accounting purposes, this prepayment was credited to an unearned revenue account.
At its final meeting for the year, Micro's board of directors authorized a $17,600 salary bonus for the corporation's president to reward him for an outstanding performance. Micro paid the bonus on January 12. The president doesn't own enough Micro stock to make him a related party for federal tax purposes.
Micro was incorporated last year. On its first tax return, it reported a $23,500 net operating loss.
Micro follows a calendar year.
Required - Compute Micro's taxable income.
Question 2 - Corporation H's auditors prepared the following reconciliation between book and taxable income. H's tax rate is 21 percent.
Net income before tax $620,000
Permanent book/tax differences 25,000
Temporary book/tax differences (86,000)
Taxable income $559,000
Required -
a. Compute Corporation H's tax expense for financial statement purposes.
b. Compute Corporation H's tax payable.
c. Compute the net increase in Corporation H's deferred tax assets or deferred tax liabilities (identify which) for the year.