SolutionProblem 77

1. Compute MM's current income tax expense or benefit for 2013

Income before income taxes$15,000,000Interest from municipal bonds(50,000)Nondeductible M&E20,000DPAD(250,000)Nondeductible fines5,000Book equivalent of taxable income$14,725,000

Net change in cumulative TTD(1,000,000)Net change in cumulative DTD390,000Net change cumulative TD(610,000)

Taxable income$14,115,000x 34%0.34Current tax expense$4,799,100

2. Compute MM's deferred income tax expense or benefit for 2013

Ending balance in TTD$(3,060,000)Beginning balance in TTD(2,720,000)Increase in deferred tax liability$(340,000)

Ending balance in DTD$1,353,200Beginning balance in TTD1,220,600Increase in deferred tax asset$132,600

Deferred tax expense$340,000Deferred tax benefit(132,600)Net deferred tax expense$207,400

Tax provision Current income tax expense$4,799,100 Deferred income tax expense207,400 Total income tax provision$5,006,500

Check Book equivalent of taxable income$14,725,000 x 34%0.34 Total income tax provision$5,006,500

3. Prepare a reconciliation of MM's total income tax provision with its hypothetical income tax expense

Reconciliation of Effective Tax RateDollarsPercent

Provision at 34% [$15,000,000 x 34%]$5,100,00034.00% [$5,100,000 / $15,000,000]Tax exempt interest ($50,000 x 34%)(17,000)-0.11% [$17,000 / $15,000,000]Nondeductible M&E ($20,000 x 34%)6,8000.05% [$6,800 / $15,000,000]DPAD ($250,000 x 34%)(85,000)-0.57% [$85,000 / $15,000,000]Nondeductible fines ($5,000 x 34%)1,7000.01% [$1,700 / $15,000,000]Provision$5,006,50033.38%