Colorado State Statutory Tax Rate versus Effective Tax Rate Discussion

Part 1: Statutory Tax Rate versus Effective Tax Rate

How do U.S. Federal income tax rates compare to other industrial-developed countries in the world (e.g., The United Kingdom, Canada, Germany, France, Australia, Mexico, etc.)?

Your assignment should be a paper 1-2 pages long, not including the required title and reference pages. It should be in APA writing style. Include at least three scholarly sources. Remember to use in-text citations as appropriate and to include your sources in your reference page.

Part 2: Schedule M1 (CT1) and M2 (CT2) For Rocky Mountain Equipment Corporation Form 1120-F

The Rocky Mountain Equipment Corporation, a Colorado Corporation, was formed by two Colorado State University business school graduates. The Rocky Mountain Equipment Corporation incorporated on October 20, 1974. The main line of business is selling recreational equipment to outdoor enthusiasts. Starting in their parents garage, they have grown the corporation to a multimillion dollar business.

To comply with accounting requirements, the company uses an accrual method of accounting. Its accumulated earnings and profits as of December 31, 2016, were $1,200. It made cash distributions during its 2016 calendar tax year of $140,089. This consisted of $85,089 to preferred shareholders and $55,000 to common shareholders. The entire distribution to preferred shareholders is a taxable dividend. The $27,500 distribution on March 15, 2016, to common shareholders is a taxable dividend to the extent of $27,318 (99.33%), and the $27,500 distribution on September 15, 2016, to common shareholders is a taxable dividend to the extent of $26,118 (94.97%).

The following profit and loss account appeared in the books of the Rocky Mountain Equipment Corporation for calendar year 2016. It is required to file Form 1120 and completes Form 1120-F (M-1 and M-2).

Account		Debit	Credit
Gross sales			$1,850,000
Sales returns and allowances		$20,500
Cost of goods sold		1,525,000
Interest income from:
Banks	$11,000
Tax-exempt state bonds	5,500		16,500
Proceeds from life insurance (death of corporate officer)			7,000
Bad debt recoveries (no tax deduction claimed)			4,000
Insurance premiums on lives of corporate officers (corporation is beneficiary of policies)		10,000
Compensation of officers		42,000
Salaries and wages		31,000
Repairs		900
Taxes		11,000
Contributions:
Deductible	$23,000
Other	500	23,500
Interest paid (loan to purchase tax-exempt bonds)		850
Depreciation		5,700
Loss on securities		4,000
Net income per books after federal income tax		140,825
Federal income tax accrued for 2016		62,225
Total		$1,877,500	$1,877,500

The corporation analyzed the retained earnings and the following items appeared in this account on its books.
Item	Debit		Credit
Balance, January 1			$225,000
Net profit (before federal income tax)			203,050
Reserve for contingencies	$10,000
Income tax accrued for the year	62,225
Dividends paid during the year	140,089
Refund of 1995 income tax			18,000
Balance, December 31	233,736
Total	$446,050		$446,050
The following items appear on page 1 of Form 1120.
Gross sales ($1,850,000 less returns and allowances of $20,500)			$1,829,500
Cost of goods sold			1,525,000
Gross profit from sales			$304,500
Interest income			11,000
Total income			$315,500
Deductions:
Compensation of officers		$42,000
Salaries and wages		31,000
Repairs		900
Taxes		11,000
Contributions (maximum allowable)		22,500
Depreciation		5,700
Total deductions			113,100
Taxable income			$202,400

Exercise to be completed:

Please prepare Schedule M-1 for Rocky Mountain Equipment Corporation using the financial information and Form 1120 line items provided above.
Please prepare Schedule M-2 for Rocky Mountain Equipment Corporation using the retained earning information provided. To accurately calculate and support the ending balance, please complete a Retained Earnings Reconciliation Table.

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