accounting 3 chapter 25 section 3 calculating federal income tax and completing a worksheet

Accounting 3Accounting 3

Chapter 25 Section 3Chapter 25 Section 3

Calculating Federal Income Calculating Federal Income Tax and Completing a Tax and Completing a

WorksheetWorksheet

Federal Income Tax Federal Income Tax AdjustmentAdjustment

Corporations expecting to pay more than $500 Corporations expecting to pay more than $500 in federal income tax are required to pay their in federal income tax are required to pay their estimatedestimated taxes in quarterly installments. taxes in quarterly installments.

These installments are recorded as a debit to These installments are recorded as a debit to Federal Income Tax Expense and a credit to Federal Income Tax Expense and a credit to Cash.Cash.

The actual amount owed is calculated at the The actual amount owed is calculated at the end of the fiscal year.end of the fiscal year.

Therefore when the annual return is Therefore when the annual return is submitted, any owed taxes outstanding must submitted, any owed taxes outstanding must be paid.be paid.


The two accounts involved in this The two accounts involved in this adjustment are Federal Income Tax Expense adjustment are Federal Income Tax Expense (an expense account under the major (an expense account under the major heading of Income Tax Expense in the chart heading of Income Tax Expense in the chart of accounts) and Federal Income Tax of accounts) and Federal Income Tax Payable (a liability account in the Current Payable (a liability account in the Current Liabilities sections of the chart of accounts).Liabilities sections of the chart of accounts).

In order to make adjustments to these In order to make adjustments to these accounts, you must first determine the net accounts, you must first determine the net income before federal income tax expense.income before federal income tax expense.

Steps to do this on next slide.Steps to do this on next slide.


Step 1: Complete all other adjustments on the worksheet.Step 1: Complete all other adjustments on the worksheet. Step 2: Extend all amounts Step 2: Extend all amounts exceptexcept Federal Income Tax Federal Income Tax

Expense to the Income Statement or Balance Sheet Expense to the Income Statement or Balance Sheet columns.columns.

Step 3: On a separate sheet of paper (or calculator) total Step 3: On a separate sheet of paper (or calculator) total the worksheet’s Income Statement columns. Calculate the worksheet’s Income Statement columns. Calculate the difference between the debit and credit totals. This the difference between the debit and credit totals. This difference becomes the net income before federal income difference becomes the net income before federal income tax expense.tax expense.

Example: Total of I. S. Credit $1,940,451.50Example: Total of I. S. Credit $1,940,451.50 Less total of I.S. Debit Less total of I.S. Debit $1,699,537.50$1,699,537.50

Equals Net Income before F.I.T. $240,914.00Equals Net Income before F.I.T. $240,914.00

Calculating Federal Calculating Federal Income TaxIncome Tax

The next step to your adjustment is The next step to your adjustment is to actually figure Federal Income to actually figure Federal Income Tax due for the fiscal period.Tax due for the fiscal period.

As the steps are explained, please As the steps are explained, please refer to page 647 in your textbook.refer to page 647 in your textbook.

This can look complicated, but follow This can look complicated, but follow along and it will become clear.along and it will become clear.


Step 1: Multiply $50,000 by a tax rate of Step 1: Multiply $50,000 by a tax rate of 15% to calculate the first FIT amount. This 15% to calculate the first FIT amount. This is the tax Winning Edge must pay on its first is the tax Winning Edge must pay on its first $50,000 of net income. $50,000 of net income. ($7,500)($7,500)

Step 2: Multiply $25,000 by a tax rate of Step 2: Multiply $25,000 by a tax rate of 25% to calculate the second FIT amount. 25% to calculate the second FIT amount. This is the tax W.E. must pay on its next This is the tax W.E. must pay on its next $25,000 of net income. $25,000 of net income. ($6,250)($6,250)

Step 3: Multiply $25,000 by a tax rate of Step 3: Multiply $25,000 by a tax rate of 34% to calculate the third FIT amount. This 34% to calculate the third FIT amount. This is the tax W.E. must pay on its next is the tax W.E. must pay on its next $25,000. $25,000. ($8,500)($8,500)


Step 4: The tax rate of 39% applies to all Step 4: The tax rate of 39% applies to all net income that falls in the range of net income that falls in the range of $100,000 to $335,000. W.E.’s net Income $100,000 to $335,000. W.E.’s net Income is $240,914. When the net income does not is $240,914. When the net income does not equal or exceed the highest dollar amount equal or exceed the highest dollar amount given in a range, the amount of net income given in a range, the amount of net income to which the tax rate is applied is to which the tax rate is applied is determined by subtracting the lowest dollar determined by subtracting the lowest dollar amount in the range from the total net amount in the range from the total net income. ($240,914 - $100,000 = $140,914)income. ($240,914 - $100,000 = $140,914)


Step 5: Multiply $140,914 by a tax rate Step 5: Multiply $140,914 by a tax rate of 39% to calculate the fourth FIT of 39% to calculate the fourth FIT amount. This is the tax W.E. must pay amount. This is the tax W.E. must pay on the remainder of its net income. on the remainder of its net income. ($54,956.46)($54,956.46)

Step 6: Add the four tax amounts Step 6: Add the four tax amounts together to determine the total FIT W.E. together to determine the total FIT W.E. must pay.must pay. $7,500 + $6,250 + $8,500 + $54,956.46 = $7,500 + $6,250 + $8,500 + $54,956.46 =

$77,206.46$77,206.46

Back to the FIT Back to the FIT AdjustmentAdjustment

Despite the fact that W.E. has paid Despite the fact that W.E. has paid $64,000 already in income tax, there $64,000 already in income tax, there is still tax money outstanding that is still tax money outstanding that must be paid.must be paid.

To determine that amount do the To determine that amount do the following:following: F.I.T. due $77,206.46F.I.T. due $77,206.46 Less Total Quarterly Payments Less Total Quarterly Payments -64,000-64,000 Equals FIT Adjustment $13, 206.46Equals FIT Adjustment $13, 206.46

Completing the Completing the AdjustmentAdjustment

Account Title Trial Balance Adjustments

Debit DebitCredit Credit

Worksheet

Federal Income Tax Payable (i)13 2 0 6 46

Federal Income Tax Expense 64 0 0 0 00 (i) 13 2 0 6 46

When this adjustment has been made, the adjustment columns must be totaled, proved, and ruled to complete this portion of the worksheet.

Completing the Completing the WorksheetWorksheet

Completing a corporate worksheet is done exactly as Completing a corporate worksheet is done exactly as it would be for a proprietorship and partnership.it would be for a proprietorship and partnership.

Every account balance from Dividends up to the top Every account balance from Dividends up to the top goes on the Balance Sheet portion of the worksheet.goes on the Balance Sheet portion of the worksheet.

Every account balance from Income Summary down Every account balance from Income Summary down to the bottom goes on the Income Statement portion to the bottom goes on the Income Statement portion of the worksheet.of the worksheet.

All four of the remaining columns must be totaled, All four of the remaining columns must be totaled, proved, and ruled. proved, and ruled.

Remember that the difference between the respective Remember that the difference between the respective debit and credit columns goes on the outside for a debit and credit columns goes on the outside for a Net Income and on the inside for a Net Loss.Net Income and on the inside for a Net Loss.

Work Together p. 652Work Together p. 652Please refer to my workbook and this page in your Please refer to my workbook and this page in your

textbook to see how everything was calculated and the textbook to see how everything was calculated and the worksheet completed. To be honest, it took long worksheet completed. To be honest, it took long

enough to do it by hand and it will take way more time enough to do it by hand and it will take way more time than I am willing to commit to do it electronically.than I am willing to commit to do it electronically.

If more than one of you need to see my workbook at the same time, I can make copies for you.

Assignment

AssignmentsAssignments

Do application 25-4 by hand.Do application 25-4 by hand. Turn it in.Turn it in. Complete 25-5 Mastery on the Complete 25-5 Mastery on the

Automated Accounting Software.Automated Accounting Software. Turn all pages you use in.Turn all pages you use in. Take chapter 25 test.Take chapter 25 test.

accounting 3 chapter 25 section 3 calculating federal income tax and completing a worksheet

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