Extra Corporation was formed in 1995. It is based in Kentucky
and operates throughout the US southeast. Extra is owned by the
Xavier family, one-third each by sister Carol (age 55), sister Joan
(age 53), and brother Buddy (age 49). The company controls over
$800 million in productive assets, most of which are located in
Kentucky.

Extra started out as a provider of materials to the
manufacturers of PDAs like the Palm Pilot, and now it performs the
same functions for various cell phone manufacturers like Samsung.
The industry is concentrated among about a half-dozen competitors,
most of which are located outside of the US. Extra has used its
favorable location and low wage structure to remain profitable in
most years, but it fears that the environmental problems created by
its production processes will attract incremental local and US
federal taxes, fines, and penalties in the next few years.
Accordingly, the entity projects that it will show net book and tax
losses for the next two to four years, after which regular
profitability will return.

Extra uses GAAP for its financial statements; although it is not
yet publicly traded, the entity’s lenders keep a close watch on
annual book income/loss. The corporation employs a tax department
of thirty-seven professionals, and an internal audit function
includes twenty-five permanent positions. Extra uses your firm for
its outside tax work, most of which is multijurisdictional tax
planning, including the income tax return that it files with the
federal government, seven states, and two cities.

Extra generates no foreign-source income or deductions at this
point. The entity is not subject to the alternative minimum tax
this year. No tax rate changes have been enacted that will apply in
future years. Extra does not record a valuation allowance to its
tax deferrals.

Extra holds only one carryforward to this tax year, a state and
federal NOL of $120 million. The book expenses that are added to
the unicap balance this year totaled $300 million (Under the unicap
rules of IRC section 263A, certain costs that are generally
expensed for book purposes are instead added to inventory cost for
tax purposes, i.e. not deducted until recovered through cost of
goods sold). Extra also claims a deduction for the domestic
manufacturing deduction under section 199 in the amount of $19
million.

Your present task is to convert the trial balance numbers into a
worksheet that calculates both the current state and federal tax
payable, and the total tax provision for Extra this year. The book
trial balance has been prepared and is presented in summary form
with annotations below.

Extra Corporation

Trial Balance Data, Condensed ($M)

With annotations

I

Identify the book-tax differences that are apparent from the
Extra trial balance. Classify them as temporary or permanent.
Assume that Extra has adopted ASU 2015-17, Balance Sheet
Classification of Deferred Taxes that requires the
classification of all deferred tax assets and liabilities as
noncurrent. Use a format like the worksheet below for this purpose.
A few sample entries have been included in the template. (See the
spreadsheet accompanying this problem)

II

Use the trial balance data to construct Extra’s tax expense
(“tax provision”) for the year. First determine the current tax
payable amounts, state and federal, that will be reported on the
year’s tax returns. Then add the deferred tax items to compute the
total income tax provision.

Extra’s tax rates are 35 percent federal, and 5 percent blended
state (before related federal effects). Federal income taxes are
not deductible in any of the states in which Extra operates, but
state income taxes are a proper federal tax deduction. All of the
states with which Extra files income tax returns define taxable
income in the same way.

You might structure your computation as illustrated below. Make
certain that your classifications of the book-tax differences match
those that you developed in Part I.

III

Construct the journal entry to record Extra’s current and
deferred tax expense for the year.

Notes re tax amounts ($M)