Motown Memories Incorporated Statement of Operations at December 31, 2021 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
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
You have been assigned to compute the income tax provision for Motown Memories Incorporated (MM) as of December 31, 2021. The company’s income statement for 2021 is provided below: (Leave no answer blank. Enter zero if applicable.)
| Motown Memories Incorporated Statement of Operations at December 31, 2021 |
|
| 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 |
| 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 |
You identified the following permanent differences:
| Interest income from municipal bonds | $ 50,000 |
|---|---|
| Nondeductible entertainment expenses | 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:
| Motown Memories Incorporated | ||||
| Temporary Differences Scheduling Template | ||||
| Taxable Temporary Differences |
BOY Deferred Taxes |
Current Year Change |
EOY Cumulative T/D |
EOY Deferred Taxes |
|---|---|---|---|---|
| $ (1,680,000) | $ (1,000,000) | $ (9,000,000) | $ (1,890,000) |
| Motown Memories Incorporated | ||||
| Temporary Differences Scheduling Template | ||||
| Deductible Temporary Differences |
BOY Deferred Taxes |
Current Year Change |
EOY Cumulative T/D |
EOY Deferred Taxes |
|---|---|---|---|---|
| Allowance for |
$ 42,000 | $ 50,000 | $ 250,000 | $ 52,500 |
| Reserve for warranties | 21,000 | 20,000 | 120,000 | 25,200 |
| Inventory IRC §263A adjustment | 50,400 | 60,000 | 300,000 | 63,000 |
| Deferred compensation | 10,500 | 10,000 | 60,000 | 12,600 |
| Accrued pension liabilities | 630,000 | 250,000 | 3,250,000 | 682,500 |
| Total | $ 753,900 | $ 390,000 | $ 3,980,000 | $ 835,800 |
Required:
- Compute MM’s current income tax expense or benefit for 2021.
- Compute MM's
deferred income tax expense or benefit for 2021. - Prepare a reconciliation of MM’s total income tax provision with its hypothetical income tax expense of 21 percent in both dollars and rates.
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