ACCT 5327
Homework Set 1
Spring 2010
Crosspointe Construction Corporation provided our audit staff with the following unadjusted trial
balance as of December 31, 2009:
Accounts:
Dr.
Cash and equivalents
$1,650,000
Notes receivable
30,000,000
Allowance for uncollectible accounts
Inventories
Depreciable realty
Accumulated depreciation
Depreciable equipment
Accumulated depreciation
Goodwill
Accounts payable
Long-term debt
Common stock
Retained earnings (January 1, 2009)
Sales
Investment income (dividends from <20% owned
firms)
Net gains (losses) from sale of investment
securities
Cost of goods sold
Selling expenses—salaries & commissions
Selling expenses—advertising
Selling expenses—reserve for warranties
Selling expenses—other
Administrative expense—salaries and options
Administrative expense—rent
Administrative expense—property taxes
Administrative expense—interest expense
Totals
Cr.
1,200,000
4,800,000
4,600,000
750,000
14,000,000
4,000,000
800,000
870,000
12,000,000
3,300,000
27,185,000
17,000,000
450,000
35,000
5,400,000
350,000
125,000
70,000
640,000
3,250,000
250,000
185,000
600,000
_____
$66,755,000 $66,755,000
The audit staff has provided us with the following additional information:
Planned adjustments to trial balance –
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The beginning balance in the allowance for uncollectible accounts was $2,500,000. The auditors
believe the ending balance should be $3,000,000.
Of the balance in depreciable realty, $100,000 represents land. The remainder is attributable to
buildings. The firm depreciates its buildings over 30 years for GAAP, using the straight-line
method. There were no new acquisitions for 2009.
The firm depreciates its equipment over seven years, using the straight-line method. For tax, the
equipment is 5 year property and the firm did not elect the straight-line method. There were no
new acquisitions for 2009.
The beginning balance in the reserve for warranties was $250,000. The auditors believe the
ending balance should be the same.
The firm invests most of its idle cash in short-term investments. Eighty-five percent of its
dividend income was received from domestic corporations. The remaining 15 percent was
received from investments in the European stock market.
Other information relevant to tax accrual –
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“Selling expenses—other” includes meal & entertainment expenses incurred in customer
development of $25,000. This account also includes charitable contributions of $600,000.
“Administrative expenses—salaries and options” includes a salary of $1,450,000 paid to the
firm’s president. The remainder was paid to the firm’s vice-presidents of sales, operations, and
finance. None received over $1 million in straight salary. In addition to the amounts listed in the
unadjusted trial balance, the firm issued nonqualified stock options to these four officers. Our
audit department has determined that compensation expense should be recorded under FAS
123R in the amount of $2,850,000, to reflect the estimated market value of these options. None
of the options had been exercised as of December 31.
All of the firm’s construction activities take place in the United States and all of the firm’s
operations constitute qualified domestic production activities for purposes of §199.
1. Compute Crosspointe’s GAAP net income before taxes for 2009.
2. Compute Crosspointe’s taxable income for 2009.
3. What will be the company’s 2009 income tax owed to the IRS? (Ignore estimated tax payments).
4. What amount will the company record as 2009 income tax expense for book (GAAP)? (For this
purpose, you should compute GAAP taxable income as GAAP income before taxes plus or minus those
tax deductions that will never be allowed for GAAP. Items for which the differences between book and
tax are only temporary should not affect GAAP taxable income.
5. Prepare a reconciliation of the company’s book-to-taxable income.
6. What is the company’s effective tax rate (GAAP tax expense to GAAP income)?