Accounting 3 Chapter 25 Section 3 Calculating Federal Income Tax and Completing a Worksheet

Federal Income Tax Adjustment Corporations expecting to pay more than $500 in federal income tax are required to pay their estimated taxes in quarterly installments. Corporations expecting to pay more than $500 in federal income tax are required to pay their estimated taxes in quarterly installments. These installments are recorded as a debit to Federal Income Tax Expense and a credit to Cash. These installments are recorded as a debit to Federal Income Tax Expense and a credit to Cash. The actual amount owed is calculated at the end of the fiscal year. The actual amount owed is calculated at the end of the fiscal year. Therefore when the annual return is submitted, any owed taxes outstanding must be paid. Therefore when the annual return is submitted, any owed taxes outstanding must be paid.

Federal Income Tax Adjustment The two accounts involved in this adjustment are Federal Income Tax Expense (an expense account under the major heading of Income Tax Expense in the chart of accounts) and Federal Income Tax Payable (a liability account in the Current Liabilities sections of the chart of accounts). The two accounts involved in this adjustment are Federal Income Tax Expense (an expense account under the major heading of Income Tax Expense in the chart of accounts) and Federal Income Tax Payable (a liability account in the Current Liabilities sections of the chart of accounts). In order to make adjustments to these accounts, you must first determine the net income before federal income tax expense. In order to make adjustments to these accounts, you must first determine the net income before federal income tax expense. Steps to do this on next slide. Steps to do this on next slide.

Federal Income Tax Adjustment Step 1: Complete all other adjustments on the worksheet. Step 1: Complete all other adjustments on the worksheet. Step 2: Extend all amounts except Federal Income Tax Expense to the Income Statement or Balance Sheet columns. Step 2: Extend all amounts except Federal Income Tax Expense to the Income Statement or Balance Sheet columns. Step 3: On a separate sheet of paper (or calculator) total the worksheet’s Income Statement columns. Calculate the difference between the debit and credit totals. This difference becomes the net income before federal income tax expense. Step 3: On a separate sheet of paper (or calculator) total the worksheet’s Income Statement columns. Calculate the difference between the debit and credit totals. This difference becomes the net income before federal income tax expense. Example: Total of I. S. Credit $1,940, Example: Total of I. S. Credit $1,940, Less total of I.S. Debit $1,699, Less total of I.S. Debit $1,699, Equals Net Income before F.I.T. $240, Equals Net Income before F.I.T. $240,914.00

Calculating Federal Income Tax The next step to your adjustment is to actually figure Federal Income Tax due for the fiscal period. The next step to your adjustment is to actually figure Federal Income Tax due for the fiscal period. As the steps are explained, please refer to page 647 in your textbook. As the steps are explained, please refer to page 647 in your textbook. This can look complicated, but follow along and it will become clear. This can look complicated, but follow along and it will become clear.

Calculating Federal Income Tax Step 1: Multiply $50,000 by a tax rate of 15% to calculate the first FIT amount. This is the tax Winning Edge must pay on its first $50,000 of net income. ($7,500) Step 1: Multiply $50,000 by a tax rate of 15% to calculate the first FIT amount. This is the tax Winning Edge must pay on its first $50,000 of net income. ($7,500) Step 2: Multiply $25,000 by a tax rate of 25% to calculate the second FIT amount. This is the tax W.E. must pay on its next $25,000 of net income. ($6,250) Step 2: Multiply $25,000 by a tax rate of 25% to calculate the second FIT amount. This is the tax W.E. must pay on its next $25,000 of net income. ($6,250) Step 3: Multiply $25,000 by a tax rate of 34% to calculate the third FIT amount. This is the tax W.E. must pay on its next $25,000. ($8,500) Step 3: Multiply $25,000 by a tax rate of 34% to calculate the third FIT amount. This is the tax W.E. must pay on its next $25,000. ($8,500)

Calculating Federal Income Tax Step 4: The tax rate of 39% applies to all net income that falls in the range of $100,000 to $335,000. W.E.’s net Income is $240,914. When the net income does not equal or exceed the highest dollar amount given in a range, the amount of net income to which the tax rate is applied is determined by subtracting the lowest dollar amount in the range from the total net income. ($240,914 - $100,000 = $140,914) Step 4: The tax rate of 39% applies to all net income that falls in the range of $100,000 to $335,000. W.E.’s net Income is $240,914. When the net income does not equal or exceed the highest dollar amount given in a range, the amount of net income to which the tax rate is applied is determined by subtracting the lowest dollar amount in the range from the total net income. ($240,914 - $100,000 = $140,914)

Calculating Federal Income Tax Step 5: Multiply $140,914 by a tax rate of 39% to calculate the fourth FIT amount. This is the tax W.E. must pay on the remainder of its net income. ($54,956.46) Step 6: Add the four tax amounts together to determine the total FIT W.E. must pay. $7,500 + $6,250 + $8,500 + $54, = $77,206.46

Back to the FIT Adjustment Despite the fact that W.E. has paid $64,000 already in income tax, there is still tax money outstanding that must be paid. Despite the fact that W.E. has paid $64,000 already in income tax, there is still tax money outstanding that must be paid. To determine that amount do the following: To determine that amount do the following: F.I.T. due $77, F.I.T. due $77, Less Total Quarterly Payments -64,000 Less Total Quarterly Payments -64,000 Equals FIT Adjustment $13, Equals FIT Adjustment $13,

Completing the Adjustment Account Title Trial BalanceAdjustments Debit Credit Worksheet Federal Income Tax Payable (i) Federal Income Tax Expense (i) When this adjustment has been made, the adjustment columns must be totaled, proved, and ruled to complete this portion of the worksheet.

Completing the Worksheet Completing a corporate worksheet is done exactly as it would be for a proprietorship and partnership. Completing a corporate worksheet is done exactly as it would be for a proprietorship and partnership. Every account balance from Dividends up to the top goes on the Balance Sheet portion of the worksheet. Every account balance from Dividends up to the top goes on the Balance Sheet portion of the worksheet. Every account balance from Income Summary down to the bottom goes on the Income Statement portion of the worksheet. Every account balance from Income Summary down to the bottom goes on the Income Statement portion of the worksheet. All four of the remaining columns must be totaled, proved, and ruled. All four of the remaining columns must be totaled, proved, and ruled. Remember that the difference between the respective debit and credit columns goes on the outside for a Net Income and on the inside for a Net Loss. Remember that the difference between the respective debit and credit columns goes on the outside for a Net Income and on the inside for a Net Loss.

Work Together p. 652 Please refer to my workbook and this page in your textbook to see how everything was calculated and the worksheet completed. To be honest, it took long enough to do it by hand and it will take way more time than I am willing to commit to do it electronically. If more than one of you need to see my workbook at the same time, I can make copies for you. Assignment

Assignments Do application 25-4 by hand. Do application 25-4 by hand. Turn it in. Turn it in. Complete 25-5 Mastery on the Automated Accounting Software. Complete 25-5 Mastery on the Automated Accounting Software. Turn all pages you use in. Turn all pages you use in. Take chapter 25 test. Take chapter 25 test.