Question 71. (LO 3) Last year, JL Corporation’s tax liability was $900,000

71. (LO 3) Last year, JL Corporation’s tax liability was $900,000. For the current year, JL Corporation reported the following taxable income at the end of its first, second, and third quarters (see table below). What are JL’s minimum required first, second, third, and fourth quarter estimated tax payments (ignore the actual current year tax safe harbor)?

Ignoring the actual current year tax liability safe harbor, the minimum required estimated tax payments for each quarter is the lesser of the payment required under the prior year tax liability exception and the payment required by the annualized income method. Under this approach, the minimum estimated tax payments are as follows:

Quarter 1: $170,000

Quarter 2: $170,000

Quarter 3: $297,500

Quarter 4: $262,500 [fourth quarter based on required annual payment under the prior year tax method ($900,000)]

72. (LO 3) Last year, Cougar Corp. (CC) reported a net operating loss of $25,000. In the current year, CC expected its current year tax liability to be $440,000 so it made four equal estimated tax payments of $110,000 each. Cougar closed its books at the end of each quarter. The following schedule reports CC’s taxable income at the end of each quarter:

CC’s current year tax liability on $1,470,588 of taxable income is $480,000. Does CC owe underpayment penalties on its estimated tax payments? If so, for which quarters does it owe the penalty?

CC is not allowed to rely on the prior year tax to determine its minimum estimated tax payments. CC made estimated tax payments of $110,000 each quarter for a total of $440,000. However, because its actual tax liability was $480,000, CC would be subject to estimated tax penalties for each quarter under the current year tax liability method. CC could avoid penalties if it made the minimum payments under the annualized income method computed below:

73. (LO2, LO 4) For the current year, CCP, Inc. received the following interest income:

· $12,000 interest from Irvine City bonds: Bonds issued in 2012 and proceeds used to fund public schools.

· $20,000 interest from Fluor Corporation bonds.

· $8,000 interest from Mission Viejo City: Bonds issued in 2013 and proceeds used to lure new business to the area.

· $6,000 interest from U.S. Treasury notes.

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