Reference no: EM132356158

Part I - Computational Problem

You are asked to prepare the Xco tax provision for the year-ended 12-31-2018. The client provides you the following information:

• Preliminary book income for 2018 is $7,100,000 *
• At 12-31-2017 (Final) & 12-31-2018 (Prelim) Xco had the following (attached) gross Book-Tax Basis Differences on its B/S:

* does not reflect late audit AJE to 12-31-2018 balance: DR Bonus Exp $100,000 CR - Accrued Bonus $100,000

• Additional info on deferred items: during 2018 Xco wrote-off the entire investment in Zco stock as the company was determined to be insolvent
This asset had originally been booked for $1,000,000 in 2016 with GAAP equity pick-ups of ($150,000) and ($350,000) in 2016 and 2017 respectively - accounted for under equity method for GAAP. The investment is a capital asset in Xco's hands (for tax) and the company currently has I/S notes that produce capital gain
• During 2018 the XCo Controller booked $500,000 of preliminary tax expense (DR - Current Exp CR - Inc Tax Payable) which is included in the prelim book income number
• Xco had a favorable perm item of $100,000 {tax-exempt interest income] and an unfavorable perm items of $180,000 [M&E, entertainment expense and § 162(m)]
• The current income tax expense account includes these entries booked during 2018 prior to the final tax AJE and included in prelim Book Income

• During 2018 Xco recorded an unfavorable Preliminary Tax Refund adjustment related to 2017 of $75,000 impacting state current expense only (this amount decreased the 2017 Over/Payment amt)
- this amount is included in prelim BI
• During 2018 Xco generated $200,000 of federal R&D tax credits
• The income tax payable account balance at 12-31-2018: DR - $150,000 composed of $120,000 overpayments applied from 2017 state tax returns to be used
as credits on 2018 state tax returns, $20,000 of refunds from 2015 state returns filed in 2016 and $10,000 expected for a 2013 amended state return filed in 2015
• During the YE end audit process the audit team proposed an entry to book an amount for a Denver county sales tax assessment of $12,500 that had been inadvertently
overlooked by the Xco accounting department - Xco passed on this entry. Additionally, based on better than expected operating results Xco's comp committee,
on 12-30-2018, approved an increase for 2018 bonuses to be paid in 2019 of $100,000. Xco did book this entry . For tax purposes the accrued bonus is not deducted until paid.
• During 2018 Xco made a federal ESP of $400,000 and state ESPs totaling $150,000
• During 2018 Xco accrued and paid an additional $125,000 for an assessment based on an audit of its 2015 State "W" tax return - this amt is in prelim BI
• In Sept 2018 Xco released $250,000 of UTP liability related to a federal permanent item tax position when the statute-of-limitation ran on its 2014 federal tax return.
This amount was accounted for in a Non-Current B/S account - "UTP - Liability". The account balance at 12-31-2018 is $0. The tax expense is included in prelim BI
• The following table provides information on apportionment for 2017 (apportionment and state tax rates did not change between 2017 and 2018):

• Please evaluate the following issue independently of the facts above (see Q # 11 below)

In 2019 Xco incurs $1,750,000 in repairs and maintenance expenses. For financial statement purposes, Xco expenses the costs as incurred and plans to take the entire $1,750,000 as a deduction on its 2019 tax return. However, Xco believes that the taxing authority would require straight-line amortization of the $1,750,00 expenditure over four - five years. Therefore, if the as-filed tax position (i.e., the full deduction claimed in the 2019 tax return) is not sustained, Xco would be entitled to only a $350,000 or $437,500 deduction in the current year with the remaining $1,400,000 or $1,312,500 of deductions taken over the next three or four years. For purposes of this example, interest is ignored.

QUESTIONS

1) Calculate the 2017 and 2018 blended state rate (net of federal benefit). You will need to calculate the apportionment factors for states V, W, X, Y, Z

2) Prepare the 2018 current provision for Xco

3) Prepare T-Account analysis for the following B/S accounts: DTA, DTL, VA, and income tax payable/(receivable) - include recon of payable amount

4) Prepare the rate reconciliation for 2018

5) Prepare the tax expense disclosure including the breakout of federal and state components of expense

6) Put together the DTA/(DTL) inventory at 12-31-2017 and 12-31-2018

7) Briefly discuss whether or not a valuation allowance is needed for the "Investment in Zco" DTA. Include a discussion on sources of taxable income.

Hint: the Installment note produces capital gain when payments are received. (I/S note arose in 2011 ($300,000 of cap Gain realized per year on receipt of $400,000 payment))

8) Prepare the supplementary disclosure for the Statement of Cash Flows

9) Show the final Tax AJE at the end of 2018 - taking into account the preliminary current provision amount booked during the year

10) What amount is due/(refundable) for the federal return and for the state returns

11) For the final bullet point - the activity occuring in 2019 - evaluate this independently of all of the other information in the problem as this occurs the year after the 2018 provision

a) Analyze this fact pattern for purposes of ASC 740 UTP and tax return purposes (including tax return disclosure)

b) Calculate both the Deferred Tax and Current Tax impact to the 2019 Financial statements - if any

Attachment:- Computational Problem Fact Pattern.rar