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You have been assigned to compute the income tax provision for Motown Memories, Inc. (MM) as of December 31, 2009. The Company's federal income tax...

You have been assigned to compute the income tax provision for Motown Memories, Inc. (MM) as of December 31, 2009. The Company’s federal income tax rate is 34%. The Company’s Income Statement for 2009 is provided below:

Motown Memories, Inc.
Statement of Operations

at December 31 2009

Net sales $50,000,000
Cost of sales 28,000,000
Gross profit 22,000,000

Compensation 2,000,000
Selling expenses 1,500,000
Depreciation and amortization 4,000,000
Other expenses 500,000
Total operating expenses 8,000,000
Income from operations $14,000,000
Interest and other income 1,000,000
Income before income taxes $15,000,000

You have identified the following permanent differences:
Interest income from municipal bonds: $50,000
Nondeductible meals and entertainment expenses: $20,000
Domestic manufacturing (§199) deduction: $250,000
Nondeductible fines: $5,000

MM prepared the following schedule of temporary differences from the beginning of the year to the end of the year:

Motown Memories, Inc.
Temporary Difference Scheduling Template


BOY Beginning Current EOY Ending
Taxable (Favorable) Cumulative Deferred Year Cumulative Deferred
Temporary Differences T/D Taxes (@ 34%) Change T/D Taxes (@ 34%)

Non-current
Accumulated depreciation (8,000,000) (2,720,000) (1,000,000) (9,000,000) (3,060,000)
BOY Beginning Current EOY Ending
Deductible (Unfavorable) Cumulative Deferred Year Cumulative Deferred
Temporary Differences T/D Taxes (@ 34%) Change T/D Taxes (@ 34%)

Current
Allowance for bad debts 200,000 68,000 50,000 250,000 85,000
Reserve for warranties 100,000 34,000 20,000 120,000 40,800
Inventory §263A adjustment 240,000 81,600 60,000 300,000 102,000
Total current 540,000 183,600 130,000 670,000 227,800

Non-Current
Deferred compensation 50,000 17,000 10,000 60,000 20,400
Accrued pension liabilities 3,000,000 1,020,000 250,000 3,250,000 1,105,000
Total non-current 3,050,000 1,037,000 260,000 3,310,000 1,125,400

Total 3,590,000 1,220,600 390,000 3,980,000 1,353,200

1. Compute MM’s current income tax expense or benefit for 2009.
2. Compute MM’s deferred income tax expense or benefit for 2009.
3. Prepare a reconciliation of MM’s total income tax provision with its hypothetical income tax expense in both dollars and rates.
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