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Worked-example setupScope and assumptions
- Cedar Trail, all book-tax roles, tax bases, rates, realization conclusion, uncertainty conclusion, allocations, payments, and jurisdictions are fictional and supplied for instruction.
- Positive current adjustments increase taxable income relative to pretax book income; negative adjustments decrease it.
- The 21 percent rates are enacted for the displayed current and reversal periods; the prior deferred measurement rate for equipment and warranty was 25 percent.
- The $20,000 ending valuation allowance is a supplied conclusion, not an output of the arithmetic.
- The disputed research deduction passes supplied recognition and has the displayed settlement distribution; interest and penalties are classified in income tax expense.
- Tax-law interpretation, forecast validation, tax-planning strategies, outside-basis conclusions, return preparation, and legal advice are excluded.
- Period
- Year ended December 31, 20X6, with future reversal periods Year 2 through Year 4
- Units
- US dollars and annual reporting periods
- Rounding
- Retain full precision; display dollars with commas and parentheses and rates to at least two decimal percentage points
Problem
Cedar Trail's draft provision records $210,000 of current tax expense and payable: 21 percent of $1,000,000 pretax book income. The supported workpapers contain current adjustments, ending temporary differences, carryforwards, a valuation allowance, an enacted-rate change, a disputed deduction, two outside- continuing tax effects, and cash payments. Rebuild the provision without a plug.
Current return rail
| Bridge item | Taxable-income effect |
|---|---|
| Pretax book income | $1,000,000 |
| Additional tax depreciation | $(120,000) |
| Warranty expense deductible later | 60,000 |
| Tax-exempt municipal interest | (20,000) |
| Nondeductible penalty | 10,000 |
| NOL deduction | (100,000) |
| Taxable income | $830,000 |
Gross current tax is $174,300 at 21 percent. The $4,300 current credit produces $170,000 return current tax. A $4,000 increase in unrecognized tax benefits and $2,000 of interest and penalties classified in tax expense raise recognized current tax expense to $176,000.
Deferred rail
| Source | Gross DTA | Gross DTL |
|---|---|---|
| Equipment taxable difference | — | $63,000 |
| Warranty deductible difference | $25,200 | — |
| Accrued compensation | 16,800 | — |
| NOL carryforward | 42,000 | — |
| Tax credit carryforward | 15,000 | — |
| Total | $99,000 | $63,000 |
After the supplied $20,000 valuation allowance, the recognized net DTA is $79,000. Subtracting the $63,000 gross DTL leaves a $16,000 net deferred tax asset. The opening $47,400 net asset was likewise after its $15,000 opening valuation allowance: $102,400 gross DTA less $15,000 allowance and $40,000 gross DTL. Moving from a $47,400 net asset to a $16,000 net asset creates $31,400 deferred tax expense.
The equipment rate decrease creates a $12,000 benefit; the warranty DTA rate decrease creates a $4,800 expense. Net enacted-rate effect is a $7,200 benefit. That amount is already inside the ending-balance bridge and must not be added a second time.
Provision and allocation
Recognized current tax expense $176,000
Deferred tax expense 31,400
Total tax expense $207,400
Allocate the supplied $12,000 expense to discontinued operations and $6,000 benefit to OCI. Continuing-operations tax expense is $201,400. All categories sum to $207,400.
Current balance, rate, and cash disclosure
Opening current payable of $30,000 plus $170,000 return tax less $160,000 cash paid yields a $40,000 ending current payable. Cash paid is not expense.
The total provision produces a 20.74-percent effective rate. Named rate items reperform as follows; each percentage uses $1,000,000 pretax book income as its denominator:
| Rate-reconciliation item | Amount | Rate effect |
|---|---|---|
| Tax at 21-percent statutory rate | $210,000 | 21.00% |
| Tax-exempt municipal interest | (4,200) | (0.42%) |
| Nondeductible penalty | 2,100 | 0.21% |
| Current tax credit | (4,300) | (0.43%) |
| Valuation-allowance increase | 5,000 | 0.50% |
| Enacted-rate change | (7,200) | (0.72%) |
| Increase in unrecognized tax benefit | 4,000 | 0.40% |
| Interest and penalties | 2,000 | 0.20% |
| Total tax expense | $207,400 | 20.74% |
The adjustments sum to a $2,600 benefit relative to $210,000 statutory-rate tax. Total taxes paid are $160,000, so the separate five-percent jurisdiction threshold is $8,000. The supplied federal, state, and foreign amounts all exceed it.
These results verify arithmetic under supplied tax and accounting conclusions. They do not establish tax basis, enacted-law applicability, realization, technical merits, allocation, or disclosure compliance.
Quantitative companions
Choose from 2 ways to work with this calculation.
Verified calculation · income tax accounting analysis
The curriculum loader recomputed this example before it entered the site build. Expand any structured input to inspect the stated facts.
- carryforwards
- 2 fields
Inspect data
{
"operating_loss": {
"amount": 200000,
"expected_realization_period": "year_four",
"kind": "net_operating_loss",
"prior_enacted_rate": 0.21
},
"research_credit": {
"amount": 15000,
"expected_realization_period": "year_three",
"kind": "tax_credit",
"prior_enacted_rate": null
}
}- cash taxes paid
- 160,000
- current enacted rate
- 0.21
- current tax adjustments
- 5 fields
Inspect data
{
"accelerated_tax_depreciation": -120000,
"nol_deduction": -100000,
"nondeductible_penalty": 10000,
"tax_exempt_municipal_interest": -20000,
"warranty_originating_difference": 60000
}- current tax credits
- 4,300
- enacted rates by period
- 3 fields
Inspect data
{
"year_four": 0.21,
"year_three": 0.21,
"year_two": 0.21
}- ending valuation allowance
- 20,000
- intraperiod allocations outside continuing operations
- 2 fields
Inspect data
{
"discontinued_operations": 12000,
"other_comprehensive_income": -6000
}- opening current tax payable
- 30,000
- opening gross deferred tax asset
- 102,400
- opening gross deferred tax liability
- 40,000
- opening valuation allowance
- 15,000
- pretax book income
- 1,000,000
- rate reconciliation items
- 7 fields
Inspect data
{
"current_tax_credit": -4300,
"enacted_rate_change": -7200,
"interest_and_penalties": 2000,
"nondeductible_penalty": 2100,
"tax_exempt_municipal_interest": -4200,
"uncertain_tax_position_change": 4000,
"valuation_allowance_change": 5000
}- statutory tax rate
- 0.21
- taxes paid by jurisdiction
- 3 fields
Inspect data
{
"federal": 120000,
"foreign": 15000,
"state": 25000
}- temporary differences
- 3 fields
Inspect data
{
"accrued_compensation": {
"book_carrying_amount": 80000,
"future_tax_effect": "deductible",
"prior_enacted_rate": null,
"reversal_period": "year_two",
"tax_basis": 0
},
"equipment": {
"book_carrying_amount": 800000,
"future_tax_effect": "taxable",
"prior_enacted_rate": 0.25,
"reversal_period": "year_three",
"tax_basis": 500000
},
"warranty": {
"book_carrying_amount": 120000,
"future_tax_effect": "deductible",
"prior_enacted_rate": 0.25,
"reversal_period": "year_two",
"tax_basis": 0
}
}- uncertain tax positions
- 1 field
Inspect data
{
"research_deduction": {
"interest_and_penalties": 2000,
"interest_penalty_policy": "income_tax",
"opening_unrecognized_tax_benefit": 6000,
"recognition_threshold_met": true,
"return_benefit": 50000,
"settlement_outcomes": [
{
"benefit_amount": 50000,
"probability": 0.2
},
{
"benefit_amount": 40000,
"probability": 0.35
},
{
"benefit_amount": 20000,
"probability": 0.3
},
{
"benefit_amount": 0,
"probability": 0.15
}
]
}
}Recomputed result
| Measure | Value |
|---|---|
| continuing operations tax expense | 201,400 |
| deferred tax expense | 31,400 |
| effective tax rate | 0.2074 |
| enacted rate change effect | -7,200 |
| ending current tax payable | 40,000 |
| gross deferred tax asset | 99,000 |
| gross deferred tax liability | 63,000 |
| net deferred tax asset | 79,000 |
| recognized current tax expense | 176,000 |
| return current tax | 170,000 |
| taxable income | 830,000 |
| total tax expense | 207,400 |