option 2: Statutory Tax Rate versus Effective Tax Rate
Part 1: Statutory Tax Rate versus Effective Tax Rate
How do U.S. Federal income tax rates compare to other industrial-developed countries in the world (e.g., The United Kingdom, Canada, Germany, France, Australia, Mexico, etc.)?
Your assignment should be a paper 1-2 pages long, not including the required title and reference pages. Adhere to the CSU-Global Guide to Writing and APA (Links to an external site.). Include at least three scholarly sources (you may use the recommended readings) to support your answers. The CSU-Global Campus Library (Links to an external site.) is a good place to find these sources. Remember to use in-text citations as appropriate and to include your sources in your reference page.
Part 2: Schedule M1 (CT1) and M2 (CT2) For Rocky Mountain Equipment Corporation Form 1120-F
The Rocky Mountain Equipment Corporation, a Colorado Corporation, was formed by two Colorado State University business school graduates. The Rocky Mountain Equipment Corporation incorporated on October 20, 1974. The main line of business is selling recreational equipment to outdoor enthusiasts. Starting in their parents’ garage, they have grown the corporation to a multimillion dollar business.
To comply with accounting requirements, the company uses an accrual method of accounting. Its accumulated earnings and profits as of December 31, 2016, were $1,200. It made cash distributions during its 2016 calendar tax year of $140,089. This consisted of $85,089 to preferred shareholders and $55,000 to common shareholders. The entire distribution to preferred shareholders is a taxable dividend. The $27,500 distribution on March 15, 2016, to common shareholders is a taxable dividend to the extent of $27,318 (99.33%), and the $27,500 distribution on September 15, 2016, to common shareholders is a taxable dividend to the extent of $26,118 (94.97%).
The following profit and loss account appeared in the books of the Rocky Mountain Equipment Corporation for calendar year 2016. It is required to file Form 1120 and completes Form 1120-F (M-1 and M-2).
|
Account |
Debit |
Credit |
|||
|
Gross sales |
$1,850,000 |
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|
Sales returns and allowances |
$20,500 |
||||
|
Cost of goods sold |
1,525,000 |
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|
Interest income from: |
|||||
|
Banks |
$11,000 |
||||
|
Tax-exempt state bonds |
5,500 |
16,500 |
|||
|
Proceeds from life insurance (death of corporate officer) |
7,000 |
||||
|
Bad debt recoveries (no tax deduction claimed) |
4,000 |
||||
|
Insurance premiums on lives of corporate officers (corporation is beneficiary of policies) |
10,000 |
||||
|
Compensation of officers |
42,000 |
||||
|
Salaries and wages |
31,000 |
||||
|
Repairs |
900 |
||||
|
Taxes |
11,000 |
||||
|
Contributions: |
|||||
|
Deductible |
$23,000 |
||||
|
Other |
500 |
23,500 |
|||
|
Interest paid (loan to purchase tax-exempt bonds) |
850 |
||||
|
Depreciation |
5,700 |
||||
|
Loss on securities |
4,000 |
||||
|
Net income per books after federal income tax |
140,825 |
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|
Federal income tax accrued for 2016 |
62,225 |
||||
|
Total |
$1,877,500 |
$1,877,500 |
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|
The corporation analyzed the retained earnings and the following items appeared in this account on its books. |
|||||
|
Item |
Debit |
Credit |
|||
|
Balance, January 1 |
$225,000 |
||||
|
Net profit (before federal income tax) |
203,050 |
||||
|
Reserve for contingencies |
$10,000 |
||||
|
Income tax accrued for the year |
62,225 |
||||
|
Dividends paid during the year |
140,089 |
||||
|
Refund of 1995 income tax |
18,000 |
||||
|
Balance, December 31 |
233,736 |
||||
|
Total |
$446,050 |
$446,050 |
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|
The following items appear on page 1 of Form 1120. |
|||||
|
Gross sales ($1,850,000 less returns and allowances of $20,500) |
$1,829,500 |
||||
|
Cost of goods sold |
1,525,000 |
||||
|
Gross profit from sales |
$304,500 |
||||
|
Interest income |
11,000 |
||||
|
Total income |
$315,500 |
||||
|
Deductions: |
|||||
|
Compensation of officers |
$42,000 |
||||
|
Salaries and wages |
31,000 |
||||
|
Repairs |
900 |
||||
|
Taxes |
11,000 |
||||
|
Contributions (maximum allowable) |
22,500 |
||||
|
Depreciation |
5,700 |
||||
|
Total deductions |
113,100 |
||||
|
Taxable income |
$202,400 |
||||
Exercise to be completed:
- Please prepare Schedule M-1 for Rocky Mountain Equipment Corporation using the financial information and Form 1120 line items provided above.
- Please prepare Schedule M-2 for Rocky Mountain Equipment Corporation using the retained earning information provided. To accurately calculate and support the ending balance, please complete a Retained Earnings Reconciliation Table.
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