ESTABROOK CORPORATION
The Estabrook Corporation is organized in Oregon, and it operates in several of the western US states. Estabrook is
owned by a small group of private equity investors. It provides catering and “pampering” services on a contract
basis, e.g., providing support for clients when they are filming television and web commercials. Estabrook follows
generally accepted accounting principles (GAAP), and it uses a calendar year for tax and book purposes.
Estabrook’s balance sheet shows the deferred tax assets and liabilities that were created in prior years.
Estabrook’s CFO has asked for your assistance in generating information needed for the corporation’s financial
statements. The financial accounting records of Estabrook for the current year produce the attached abbreviated
trial balance. Other information is available from last year’s tax file and supporting records. Follow all of the
public company disclosure rules of ASC 740, without regard to materiality or significance.
Information from Estabrook tax and accounting files (all $K)
1.
Estabrook’s truck drivers were responsible for $50 in speeding tickets, all of which the company paid
during the current year.
2.
The interest income was received from bonds issued by ExxonMobil ($30) and the City of Charleston
($45).
3.
The Deferred Revenue account was established because Estabrook received full payment this year on a
contract for services. None of the deferred revenue has been included in book income. For tax purposes,
one-half of the revenue will be recognized as taxable income in the current year, and one-half in the next
year.
4.
Estabrook holds life insurance policies on its five officers. Activity concerning these policies this year
included the following.
Proceeds collected, due to death of VP-Operations
Premiums paid, all policies
Increase in cash surrender value, all policies
500
200
45
5.
Estabrook sold some of its marketable securities, held as a capital asset per a previous IRS audit
settlement, at a $75 loss.
6.
Estabrook contributed $1,000 to its defined benefit retirement plans, but due to carryovers $1,750
qualified for an income tax deduction in the current year.
7.
Estabrook’s tax department reported a $70 total of documented expenses for entertainment.
8.
Estabrook holds a $60 NOL carryforward, for both state and federal purposes.
9.
Estabrook accrued a current-year tax expense of $500 federal and $200 state.
10. Statutory tax rates for Estabrook are 21% federal and 6% for the states (blended). Thus, if needed, the
combined state and federal tax rate net of the state tax deduction is 25.74 percent. Unless otherwise
noted, state income tax laws piggyback onto federal income tax provisions in all states in which Estabrook
has nexus. None of the states with which Estabrook has nexus allows a deduction for book federal
income tax expense.
11. There are no enacted state or federal income tax rate changes that apply to Estabrook. Other balance
sheet data follow.
PwC Case Studies in Taxation, © 2016, PwC, LLP
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Item
Book Bad Debt
Allowance
Beginning of Year
Balance
200
End of Year
Balance
Notes
240
Specific write-offs and
recoveries during the
year netted to zero
There were no
acquisitions or
dispositions during the
year
Book net asset
cost v Tax basis
-500
-850
Cumulative
unicap
adjustment
170
400
PwC Case Studies in Taxation, © 2016, PwC, LLP
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Estabrook Corporation
Book Balance Sheet Summary ($K)
End of Current Year
Assets
Cash
Marketable securities
Accounts receivable
$
1,500
2,550
1,100
Inventories
2,000
Property, plant, equipment, net
of depreciation
Notes receivable, long term
Deferred tax asset
All other assets
2,500
210
100
2,750
TOTAL
Liabilities and Shareholders'
Equity
Accounts payable
Taxes payable
Deferred revenues
Accrued pension liabilities
$
12,710
$
600
1,200
300
4,000
Notes payable, current
Notes payable, long term
Deferred tax liability
175
1,505
125
Shareholders' equity
Retained earnings
1,000
3,805
TOTAL
$
Statutory Tax Rate
Federal
State
21%
6%
Federal, net of state tax deduction
19.74%
12,710
21% - [(.21) x 6%]
PwC Case Studies in Taxation, © 2016, PwC, LLP
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Estabrook Corporation
Trial Balance (Summary) ($K)
Current Year
Sales, Expenses with no book-tax differences
Cost of Goods Sold (exclusive of unicap)
Fines Paid to Govts
Bad Debt Expense
UNICAP Adjustment
Interest Income
Total
20,000
16,000
Book
20,000
16,000
Tax
20,000
16,000
(50)
(40)
(50)
(40)
0
0
Difference
Temporary
Permanent
50
40
75
Book Income
Taxable Income Subtotal
Total Differences, Before Taxes
(665)
PwC Case Studies in Taxation, © 2016, PwC, LLP
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Estabrook Corporation
Tax Provision ($000)
Current Year
Summary
Tax Provision -- Current
Tax Provision -- Deferred
Pre-Tax Book Income
Permanent Differences
Adjusted Pre-Tax Income
Federal Income Tax
A
State Income Tax
B
Tax Provision
Effective Tax Rate, Book
C
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Estabrook Corporation
ASC 740 / FAS 109 Journal Entries -Condensed
Current Year
JOURNAL ENTRY (Condensed) – Requirement V
DR
CR
Federal Income Tax Expense
State Income Tax Expense
Deferred Tax Liability
Federal Income Tax Payable
State Income Tax Payable
To record the tax expense and deferrals for the current year
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