1.Compute the current income tax expense or benefit for Sparrow assuming a 21% tax rate.
2.Compute Sparrow's deferred income tax expense or benefit. Provide the full entry to record the tax provision for the year.
3.Prepare a reconciliation of Sparrow's total income tax provision with its hypothetical income tax expense in both dollars and rates (compute the rate to the nearest hundredth of a percent (i.e. 21.62%).
4.Why is Sparrow's effective tax rate different from the statutory tax rate of 21%? Does this reflect good tax planning on Sparrow's part? What is the cost of achieving this effective tax rate?
5.Assume Sparrow's tax rate for the current year increased to 28%. Recompute Sparrow's deferred income tax expense or benefit for 2020 using the template on the following page.
6.Sparrow's tax director, Cardinal Grosbeak, believes the firm may actually be able to deduct the Meals and Entertainment Expense of $30,000 because the firm's manufacturing facility is far from any available restaurants. However, he is not confident that it is more likely than not the position would be sustained under audit. Assume the firm decides to tax this deduction on its tax return. Re-do the full journal entry for the tax position assuming the firm plans to take the deduction on its tax return. (Ignore question 5, and assume rate remains at 21%).
- On December 27, 2020 Cardinal got a call from the IRS notifying him that the agency would not allow Sparrow a deduction for $13,000 in country club dues as a business expense from the 2016 tax return. As a result of the audit, Sparrow now owes the IRS an additional $4,420 in tax payments related to 2015. At the time of filing the return, Cardinal had some concerns about whether they would be allowed to deduct the country club dues and had set up a reserve for uncertain tax benefits of $3,000 related to the tax position. Record the necessary journal entry given this new information. Assume Sparrow will make the payment in January of 2021.
Sample Solution