Tax Provision Case Study

The assignment is about preparing a tax provision for Bear Down, Inc. (BDI) based on the provided financial information and additional facts gathered from the company. The goal is to understand what information needs to be gathered from the client to complete the entire tax provision, and to identify permanent and temporary differences that affect the income tax payable, deferred tax asset and liability balances, and current and deferred tax expense.

Accounting 556 – University of Arizona
ASC 740 Tax Provision Case
Bear Down, Inc. (BDI)
Objective At the end of this exercise the participants will be able to
 Understand what information needs to be gathered from the client to complete
the entire tax provision.
 Understand the importance of involvement of joint planning by both the Audit
and Tax function in the provision preparation process.
 Given a balance sheet, trial balance (included in the Excel workbook), and other
selected financial information, identify additional information needed from the
company. Calculate the income tax payable, the deferred tax asset and liability
balances, and the current and deferred tax expense, record the necessary journal
entry, prepare the tax rate reconciliation, and complete the Company’s tax
account roll-forward analysis (i.e., beginning tax account balances to ending tax
account balances).
Background Following is a balance sheet and other miscellaneous information for Bear Down,
Inc. (BDI) for the year ended December 31, 20X3. The controller has asked you to
assist in the preparation of the tax provision. You have received a draft copy of the
financial statement without final tax numbers.
Using the limited information below and whatever additional information you are
able to obtain, compute the current year tax accrual and provision so that a final audit
adjustment can be made prior to the Company’s earnings release next week.
Balance Sheet
December 31, 20X3
Cash $1,392,017 Accounts payable $1,267,565
Accounts receivable (net) 907,079 Current notes payable 269,721
Inventory 1,099,510 Deferred revenue 188,000
Investment in securities
Deferred tax asset
3,392,994
18,626
Income tax payable
Accrued liabilities
262,000
1,252,537
Land and property—net 925,000 Long-term debt 1,841,898
Investment in subsidiary 100,000
Long-term note receivable 150,000
Other assets 354,069 Equity & retained earnings 3,257,574
Total assets $8,339,295 Total liabilities & equity $8,339,295

Case Study
Objective To provide an opportunity to understand what fundamental information we need to gather
from the company. Also, understand what potential issues come up in the data gathering of
pertinent information necessary in preparing and reviewing the tax provision.
After your discussions with the controller, your review of the trial balance, draft
financial statements and Board of Directors minutes, you have gathered the following
information:
Facts and other
information
(a) Cumulative temporary difference data at 12/31/20X2 that cannot be readily derived from
the prior year trial balance is as follows:
Basis Difference in Fixed Assets $ (130,000)
Sec. 263A Inventory Capitalization (“Unicap”) $ 8,000
Federal NOL Carryforward $ 155,000
State NOL Carryforward $ 155,000
(b) The Federal and State NOL carryforwards to 20X3 could not be carried back; they expire
in 20Y3.
(c) In the current year, the client has determined that there is no longer a morale problem
with its employees and, therefore, terminated the vacation plan. The vacation accrual as
of 12/31/20X2 was paid out as follows: $30,000 by March 15, 20X3, $40,000 by June
15, and all $55,000 by September 15. The timing of these payments was consistent with
the Company’s estimates at the time the 20X2 tax provision was prepared.
(d) With regard to the Section 263A Unicap adjustment, the Company’s tax manager
estimates that the 20X3 year-end balance will be $14,000.
(e) Basis difference between Net Book Value (book value less accumulated depr.) and Net
Tax Value (tax basis less accumulated depr.) in fixed assets at December 31, 20X3 is
($45,000); i.e., book value exceeds tax basis by $45,000.
(f) The applicable federal tax rate is 21%. BDI’s state tax rate is 7.10%.
(g) There are no “true-up” adjustments required for the prior year; therefore, the federal and
state tax payments made with the prior year return equaled the tax payable balances on
the books at the end of the preceding year.
(h) Other than the federal deduction of state income taxes, the permanent and temporary
differences are the same for both federal and state.

Activity 1. Based on the information above, identify the permanent and temporary differences for the
year ended December 31, 20X3. Also, review the provided comparative trial balances to
identify any additional permanent and temporary differences.
Activity 2. Using the facts gathered, complete the worksheet provided.
Activity 3. Complete the Tax Account Roll-forward Analysis with the information provided.
Activity 4. Prepare the tax provision journal entry.
Activity 5. Prepare the tax rate reconciliation.