Wingo Inc, which has a 34% income tax rate (also assume this is the applicable t

Question

Wingo Inc, which has a 34% income tax rate (also assume this is the applicable tax rate) is considering making a substantial investment in marketable securities that will generate annual income of 400,000.

Analyze each of the following four scenarios:

a. The income is fom tax - exempt bonds and wingo will pay regular income tax but no AMT.

b. The income is from dividends on publicly traded stock eligible for the 70% dividends received deduction and Wingo will pay regular income tax but no AMT.

c. The income is from tax exempt bonds and Wingo is in an AMT position and has a positive ACE adjustment before consideration of the interest income.

d. The income is from dividends on publicly traded stock eligible for the 70% dividends received deduction and Wingo is in an AMT position and has a positive ACE adjustment before consideration of the interest income.

For each scenario:

what is Wingos after tax cash flow?

how is the income reported for financial and taxable income?

what is the journal entry to record the tax accrual?

Explanation / Answer

A) Since income is from tax expemt bonds there is no regular income tax and company does not need to pay AMT. After tax cash flow= 400000-0 =        4,00,000 Income will be recorded under income from investment. B) Taxable Income : Dividend Income =        4,00,000 Less : Expemtion        2,80,000 (70% of 4,00,000) Taxable income        1,20,000 Tax            40,800 (34% on 1,20,000) After tax cash flow= 4,00,000-40,800 = 359200 Income Tax Charge (P&L) Dr 40,800        To Income Tax Payable Cr 40,800 C) Since income is from tax expemt bonds there is no regular income tax and company does not need to pay AMT. Calculation of AMT Taxable Income        4,00,000 AMT Adjustment Positive                     -   Tax Preferences                     -   AMT Adjustment Negative                     -   AMTI        4,00,000 Expemtion                     -   ( Exemption of 40,000 is available but it gets pahsed out completely if AMTI is higher than 3,10,000) AMT Base        4,00,000 AMT Tentative Tax            80,000 (4,00,000 * 20%) Regular Tax liability                     -   AMT            80,000 After tax cash flow= 4,00,000-80000 = 320000 Alternative Minimum Tax Charge (P&L) Dr 80,000        To Alternative Minimum Tax Payable Cr 80,000

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