Tax Compliance and Provision – Part I Instructions
Your tax senior has e-mailed you Oh Gnome You Didn’t, Inc.’s GAAP-basis trial balance and financial statements for the 2018 calendar year, prepared using Microsoft Excel, and has asked you to convert Gnome’s book income into taxable income within the same Excel workbook.The Excel workbook contains pre-formatted tabs you’ll need to complete to properly calculate taxable income.
Your tax senior has also asked you to prepare Form 1120, Schedule M-3 for Gnome once you have finished computing taxable income.
Please read each of the below instructions carefully as you complete this part of the project:
Taxable Income Calculation using Microsoft Excel
1.The Financial Statements and Trial Balance can be found in the last 2 worksheets of the Excel workbook.
a.On the “Trial Balance” tab, make sure each of the accuracy checks calculated in red throughout the worksheet shows a result of zero.
2.You will ONLY be working with the PINK tabs for Part I of this project.
3.Click on the worksheet titled “Perm Book-Tax Differences”.
a.For each type of permanent difference, select the appropriate answer in the drop-down boxes within each of the cells shaded in GREEN (16 in total).
b.Hint – you will need to use the “Trial Balance” tab to help you determine the correct “Acct. Number” for the applicable cells.
4.Click on the worksheet titled “Temp Book-Tax Differences”.
a.Select the appropriate answer in the drop-down boxes within each of the cells shaded in GREEN (31 in total).
b.Hint – you will need to use the “Trial Balance” tab to help you determine the correct “Acct. Number” for the applicable cells.
c.There are also YELLOW cells (3 in total) that require manual numerical inputs.Enter 0 if applicable.
5.Once you’ve fully completed the Perm and Temp Book-Tax Differences tabs, select the “Book-to-tax Rec” worksheet.
a.The accuracy checkpoint should show a variance within +/- 1.0 (cell C30).
6.Save the completed Excel workbook (only the PINK tabs should be completed) and upload into the applicable Canvas assignment.
Continued…
Preparation of Schedule M-3 (Form 1120)
Your tax senior has also asked you to prepare Form 1120, Schedule M-3 for Gnome once you have finished computing taxable income.
Option 1
1.Print the file titled “Schedule M-3 – partially completed.pdf”.
2.Complete Parts II and III of Schedule M-3 by hand:
a.Locate the rows with book-tax differences and input the book-tax adjustment you calculated in Step 1, making sure you properly input the adjustment in the Temporary or Permanent columns on the Schedule M-3.
i.Compute the resulting taxable income/deduction and input your answer in column (d) of the applicable row.
b.Hint – in Part III, expense amounts are shown as positive amounts.Therefore, if a book-tax difference reduces book expense, you will show a negative number in the Temporary or Permanent columns.
c.The book-tax differences associated with capital losses and income tax expense have already been completed for you.
d.In Part III, total each column in Row 38 – column (a) has already been totaled for you.
e.in Part II, subtotal each column in Row 26 as instructed on the form – column (a) has already been subtotaled for you.
f.In Part II Line 27, fill in the amounts you totaled for each column in (d) above.
g.In Part II, input the total for each column in Row 30, following the specific instructions on the form.
3.Checkpoint – Schedule M-3 Part II Row 30 column (d) should equal the taxable income you calculated in Step 1 (on the “Book-to-tax Rec” Excel worksheet).
4.Scan the completed Schedule M-3 and upload into the applicable Canvas assignment.
Oh Gnome You Didn’t, Inc. Oh Gnome You Didn’t, Inc. Oh Gnome You Didn’t, Inc. Oh Gnome You Didn’t, Inc.
Income Statement Statement of Retained Earnings Balance Sheet Statement of Cash Flows
For the Year Ended 12/31/2018 For the Year Ended 12/31/2018 As of 12/31/2018 For the Year Ended 12/31/2018
Assets Cash from Operating Activities
Service Revenue 1,394,000 Balance at Jan. 1, 2018 0 Cash 632,673
Accounts Receivable, net 331,773 Cash received from customers 1,048,800
Payroll Expense 140,356 Net Income 571,550 Other Current Assets 14,000 Cash paid in the normal course of operations (189,327)
Rent Expense 36,000 Dividends Paid (150,000) Total Current Assets 978,446 Cash paid for organizational costs (51,800)
Supplies Expense 13,955 Net Cash Provided by Operating Activities 807,673
Depreciation Expense 142,125 Balance at Dec. 31, 2018 421,550 Bond Investment 100,000
Amortization Expense 94,827
Organizational Expense 51,800 Furniture & Fixtures, net 36,000 Cash from Investing Activities
Charitable Contributions 20,500 Equipment, net 686,875
Other SG&A Expense 37,384 Total PP&E, net 722,875 Cash paid to acquire PP&E (865,000)
Total Expenses 536,947 Cash paid to acquire capital investments (200,000)
Goodwill 657,000 Cash received from the sale of capital investments 75,000
Income from Operations 857,053 Other Intangibles, net 283,173 Cash paid to acquire intangible assets (1,035,000)
Total Intangibles, net 940,173 Net Cash Used in Investing Activities (2,025,000)
Interest Income 6,000
Total Non-Operating Income/Gain 6,000 Total Assets 2,741,494
Cash from Financing Activities
Interest Expense 64,000 Liabilities
Loss on Sale of Investment 25,000 Accounts Payable 11,000 Cash received from stockholders 400,000
Total Non-Operating Expense/Loss 89,000 Salaries & Wages Payable 10,000 Cash received from bank loan proceeds 1,600,000
Interest Payable 64,000 Cash paid for dividend distributions (150,000)
Income before Income Taxes 774,053 Income Tax Payable 68,168 Net Cash Provided by Financing Activities 1,850,000
Income Tax Expense 202,503 Other Current Liabilities 21,265
Net Income/(Loss) 571,550 Total Current Liabilities 174,433 Net increase in cash for the year ended Dec. 31, 2018 632,673
Cash Balance at January 1, 2018 0
Note Payable 1,600,000 Cash Balance at December 31, 2018 632,673
Deferred Tax Liability 134,335
Total Liabilities 1,908,768
Stockholders’ Equity
Common Stock 2,000
Additional Paid-in Capital 398,000
Retained Earnings 421,550
AOCI – Stock Options 11,176
Total Stockholders’ Equity 832,726
Total Liabilities & Stockholders’ Equity 2,741,494