Assume that Rory, Inc. makes a $ 500,000 capital investment and elects an immedi

Question

Assume that Rory, Inc. makes a $ 500,000 capital investment and elects an immediate expense deduction for tax purposes. Management designated this treatment to be an uncertain tax position. The uncertainty of this tax position is whether the capital expenditure qualifies as eligible property for an immediate deduction. The equipment is capitalized for financial reporting purposes and is depreciated over a 10-year useful life using the straight-line basis with no residual value, resulting in depreciation expense of $ 50,000 per year Based on an analysis of prior tax cases, the most likely sustainable position would be to use MACRS depreciation for five-year property resulting in a first-year depreciation expense of $ 100,000 (i.e., 20% x $ 500,000). The entity reports $ 1,810,000 of income before tax and depreciation (or taLavigne any Section 179 deductions) and is subject to a 40 % tax rate "As Filed" Amount of the Tax Benefit That Management Expects to Sustain $500,000 S212,500 $100,000 $68,750 % Likelihood That the Tax Position Will Be Sustained at This Level 10% 20 % 30 % 40% Prepare the journal entry to record the tax provision for the current year Corale's unrecognized tax benefits at the beginning of the year amounted to $ 200,000. Of this amount, S 29,900 was settled during the year. Based on this information, prepare the roll forward reconciliation for Corale's unrecognized tax benefits a. b.

Explanation / Answer

MACRC 20% For 5 years Depreciation -20% Capital Investment $500,000 Depreciation ($100,000) As per 40% likelyhood for sustainibility for the benefit) ($68,750) Total First year deduction ($168,750) Tax provision ($67,500) Journal entry for Tax Provision For tax Debit $67,500 Deprecition Debit $100,000 To TDS Receivable Credit $68,750 To Cash Bank Credit $98,750 Amount Beginning Balance(un recogized tax benefit) $200,000 Additions: increase for tax position taken during current year $67,500 Less: Decrease as a settlement of tax autorities $29,900 Ending Balance $237,600

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