1120 Tally, Inc. Case Study Facts: Using Trial Balance Bridge

Tally Case Study Facts: Introduction

The general ledger data for Tally, Inc. has been exported from the company’s general ledger software. Tax Return Codes (TRCs) have been assigned to each account number in the company’s Trial Balance, and M-3 Tax Return Codes (MRCs) have been assigned to all income and expense accounts in the Trial Balance. The data was then saved as a DIF file (TallyTB.dif). In addition, a Tax Combination Code DIF File (TallyTCC.dif) has been created for you to use with the Bridge Application. Your task is to complete the return using Bridge. You will import the data from the DIF files, verify defaults, enter journal entries in Bridge, and merge the data into the 1120 tax application.

Once the data is merged, you will use the tax application to add additional items to the tax return. The Allocation and Apportionment DIF file (TallyAA.dif) and a template file (TallyA&A.kat) will be used to import state information to help you complete the training return.

Use the Data Entry section for instructions and hints when you are not sure where or how to enter the tax data. You should verify all the information and enter or update information as needed.

General Information

Before you use Bridge, verify the Company Information.

  1. Select Quick Track > Entity Information.
  2. Verify the following:
    Name

    Tally, Inc.

    Address

    600 Bay Street
    Chicago, Illinois 60699

    EIN11-11111111
  3. Enter the Date of Incorporation: 1/24/1973.
  4. Verify the Return Type: 1120 US Corporation.
  5. Verify the Entity Type: Corporate Single Entity.

You should ensure your return type is set correctly before using Bridge. The return type determines what options are available in the Bridge Application.

Accessing Bridge

Electronic files for trial balance data, tax combination codes, and allocation and apportionment are located in the C:\Program Files(x86)\RIA\RS2019 directory.

Bridge is required to complete this case study. If you do not have Bridge installed, you will not be able to access the files referenced in this training exercise.

Once you have created a new case study return for the Tally, Inc., begin by opening the tax return and accessing Bridge.

Select Access > Trial Balance from the menu.

Bridge Defaults

  1. From the Options menu, verify that all automatic journal entries, with the exception of Federal Income Tax Provision, are checked. If Federal Income Tax Provision is checked, uncheck the box.

    This case study has Schedule M-3. It is not recommended that the automatic journal entry for Federal Income Tax be activated if an M-3 is to be prepared.

  2. Select Options > Merge Defaults.
  3. Verify that the Merge Defaults have checked boxes for all tabs:
    Page 1

    Merge Page 1: Income and Deductions

    Sch. A

    Merge Schedule A: Cost of Goods Sold

    Sch. C

    Merge Schedule C: Dividends and Special Deductions

    Sch. L

    Merge Schedule L: Balance Sheet

    Sch. M-1

    Merge Schedule M-1: Rec. of Income(Loss)

    Sch. M-2

    Merge Schedule M-2: Analysis of Unappropriated Retained Earnings

    Sch. M-3

    Merge Schedule M-3: Reconciliation of Income Statement with Return

Importing Data into Bridge

Build a template for the DIF Files using the information below and import the trial balance information and the tax combination code descriptions.

Importing Trial Balance Information

The columns of TallyTB.DIF are arranged as follows:

  1. Start importing on row 2:
    Column

    Number

    AGeneral ledger account description
    BGeneral ledger account number
    CPrior year adjusted balance
    DCurrent year book balance
    ETax combination code
    FTax return code
    GM-3 Tax Return Code
    H M-3 Tax Combination Code
  2. Once you have tagged all the columns with the correct headings, Bridge will automatically sort the items by account number. To have the items appear in Tax Return Code order, go to Edit > Sort Trial Balance, then click Tax Return Code.

Importing the Tax Combination Code Descriptions

The columns of TallyTCC.DIF are arranged as follows:

  1. Start importing on row 2:
    Column

    Number

    ATax return code
    BTax combination code
    CTax combination code description
  2. After importing, from the Options menu, verify that the Return default is set to Close to Acct #2960.

Tax Reclassification Entries

  1. Select Ledger > Journal Entries from the menu.
  2. Click the Tax reclassification radio button.
  3. Click New.
  4. Enter a description for each journal entry.
  5. Add the following journal entries to reclassify tax items:
    GL ACCT #DescriptionDebitCredit
    Journal Entry #1 Reclassify Officers Salaries
    TAX41-210Officers Compensation$ 1,775,000 
    1120Salaries and Wages $ 1,775,000
    Journal Entry #2 Reclassify Capital Gain Income
    750Miscellaneous Income$ 10,000 
    TAX31-620Capital Gain Net Income
    (Schedule D)    		 $ 10,000
    Journal Entry #3 Reclassify Meals and Entertainment
    1818Employee Relations$ 2,000 
    1924Meals and Entertainment $ 2,000
    Journal Entry #4 Reclassify Federal Income Tax - current and deferred
    1285Federal Income Tax
    Provision - Deferred    		$30,000,000 
    1280Federal Income Tax
    Provision - Current    		 $30,000,000
    Journal Entry #5 Reclassify income from partnership out of gains account
    600Net Income or (Loss) on
    Sales Including FA    		$ 15,000 
    608Income/Loss from US
    Partnerships    		 $ 15,000

You can reclassify balances between accounts for tax return presentation. Reclassification cannot be made from the balance sheet to the income statement, but only between items on the balance sheet or between items on the income statement.

Assigning MRC Codes

Journal entries #1 and #2 of the Tax Reclassification Entries are using the TAXnn-nnn feature of the software, allowing the creation of account numbers that are not part of the general ledger. With the TAXnn-nnn feature, the account number and the TRC code are assigned and will appear on the bridge grid. The MRC codes for these accounts have not been assigned. You will need to assign the MRC codes now.

  1. Make sure the Grid Display Options in View have been set to include the display of MRC, MCC, Adjusted Book Balance, Tax Reclass Adjustments, M1/M3 Adjustments, Journal Entry Type, and Final Tax Balance.
  2. Find the line for the account number TAX41-210 on the grid.
  3. Tab across the grid to the MRC code column for this line. Enter I420.
  4. Go back to the Account Number column and find account number TAX31-620 on the grid.
  5. Tab across the grid to the MRC code column for this line. Enter I320.
  6. In addition to the entries shown here, the system will post a reclassification. These are called automatic entries and will begin the account number with AUTO. This entry is automatically made because the Automatic Journal Entry under the Options menu has the Cost of Goods Sold (COGS) check box selected.
    GL ACCT #DescriptionDebitCredit
    AUTO40-110COGS: Beginning Inventory$ 5,655,000 
    AUTO40-120COGS: Purchases$ 2,145,000 
    AUTO40-190COGS: Ending Inventory $ 7,800,000

M-2 Adjustments

Your M-2 is out-of-balance. To balance it, you need to make an adjusting entry for Cash Distributions.

  1. Select the Schedule M-2 radio button.
  2. Enter the following:
    GL ACCT #DescriptionDebitCredit
    Journal Entry #1 - Record Cash Distribution
    TAX62-308Distributions: Cash$91,605,800 
    The other half of the entry will be made for you
    M2_BAL M2Balancing Account $91,605,800
  3. Click Done and Done again.
  4. Calculate the information. Now verify the information is in balance. Press F9 to calculate all of the information you have imported and entered.
  5. Once the compute is complete, select View > Tax Summary from the menu. You should have no differences.
  6. Verify that the data is in balance.
  7. Close the Tax Summary.

M-1/M-3 Adjustments

You need to make journal entries for any book to tax differences you have for the return.

  1. Select Ledger > Journal Entries from the menu.
  2. Click M1/M3 Adjustments.
  3. Click New.
  4. Add the following journal entries to record book/tax differences. When making the entries, you must also indicate whether the item is a temporary or permanent difference. The default in the bridge is temporary.

The .004, etc., adds a TCC (Tax Combination Code) description. Otherwise, your entry would just show Other Expenses Not Deducted on return. If you want detail, you must use TCCs for M-1 descriptions.

GL ACCT # Description Debit Credit
Journal Entry #1: Record book to tax depreciation (Temporary)
922 Depreciation $ 1,625,566  
TAX60-510 Depreciation difference   $ 1,625,566
Journal Entry #2: Record beginning inventory adjustment (Temporary)
TAX40-110 COGS: Beg Inventory $ 250,000  
TAX60-540.004 COGS: Sec 263A Beginning   $ 250,000
Journal Entry #3: Record inventory adjustment (Temporary)
TAX60-240.001 COGS: Sec 263A Ending $ 350,000  
TAX40-190 COGS: End Inventory   $ 350,000
Journal Entry #4: Record Cost of Goods Sold Expenses (Permanent)
1924 Meals and Entertainment $ 1,500  
927 Meals & Entertainment (CGS)   $ 1,500
Journal Entry #5: Record inventory obsolescence adjustment (Permanent)
TAX40-150 COGS: Other Costs $ 145,000  
TAX60-540.001 Inventory Obsolescence   $ 145,000
Journal Entry #6: Record prepaid ins. adjustment (Temporary)
909 Insurance - General $ 365,000  
TAX60-540.002 Prepaid Insurance   $ 365,000
Journal Entry #7: Record adjustment to warranty reserves (Temporary)
TAX60-240.002 Warranty Reserve $ 500,000  
911 Warranty   $ 500,000
Journal Entry #8: Record dues adjustment (Permanent)
TAX60-240.003 Club Dues $ 20,000  
1816 Due and Periodicals   $ 20,000
Journal Entry #9: Record Foreign Taxes adjustment (Permanent)
TAX60-240.004 Foreign Taxes $ 80,000  
1281 Foreign Income Taxes   $ 80,000
Journal Entry #10: Record adjustment for Bad Debt reserve (Temporary)
TAX60-240.005 Bad Debt Reserve (Non-475) $ 1,000,000  
1160 Bad Debts   $ 1,000,000
Journal Entry #11: Record adjustment to benefits (Temporary)
TAX60-240.006 Post Retirement $ 4,800,000  
1760 Employee Benefit Program   $ 4,800,000
Journal Entry #12: Record accrual adjustment (Temporary)
1760 Employee Benefit Programs $ 1,800,000  
TAX60-540.005 Worker’s Comp   $ 1,800,000
Journal Entry #13: Record bonus adjustment (Temporary)
1120 Salaries $ 400,000  
TAX60-540.006 Bonuses   $ 400,000
Journal Entry #14: Record foreign exchange difference (Permanent)
709 Unrealized Foreign Currency $ 40,000  
TAX60-450.001 Unrealized foreign exchange gain   $ 40,000
Journal Entry #15: M-1/M-3 for Federal Income Tax (Permanent)
TAX60-110 Federal Income Tax $56,000,000  
1280 Federal Income Tax
Provision - Current 		  $26,000,000
1285 Federal Income Tax
Provision - Deferred 		  $30,000,000
Journal Entry #16: Reclassify capital gains for M-3 (Permanent)
TAX31-620 Capital Gain Net Income
(Schedule D) 		$ 10,000  
605 Worthless Stock $ 5,000  
606 Gross Capital Gains from Schedule D,
excluding flow-through entities 		  $ 15,000
Journal Entry #17: Reclassify 4797 income for M-3 (Permanent)
600 Net gain or (loss) on sales
including FA 		$ 35,000  
607 Net gain/loss reported on
Form 4797 		  $ 35,000
Journal Entry #18: Reverse partnership book income (Permanent)
608 Income/loss from US partnerships $ 15,000  
TAX60-540 Other Tax Deductions Not
Recorded on Books 		  $ 15,000
Journal Entry #19: Record partnership K-1 amounts (Permanent)
608 Income from partnership   $ 6,000
609 Partnership capital gains/losses   $ 7,000
TAX60-450 Other Book Income not on the return $ 13,000  

Assigning MRC Codes

Once again, you will need to assign MRC codes to TAXnn-nnn numbers created by journal entries. Journal Entries #2, #3, and #5 all created accounts not previously on the chart of accounts. Journal Entry #16 also used a TAXnn-nnn number 31-620, but you already assigned an MRC code for this account when making the Tax Reclassification entries. You will need to assign the MRC codes to Journal Entries #2, #3, and #5 now.

  1. Find the line in the grid for TAX40-110.
  2. Tab across the grid to the MRC code column and enter E890.
  3. Go back to the account number column and find account TAX40-190.
  4. Tab across the grid to the MRC code column and enter E890.
  5. Go back to the account number column and find account TAX40-150.
  6. Tab across the grid to the MRC code column and enter E890.

In general, if you are preparing a return and find that the bridge is in balance except for the M-3, you have probably failed to assign some MRC codes to new accounts.

Flow-Through Entity Information

Tally, Inc., has erroneously recorded partnership book income from XYZ Partnership of $15,000 in account #600, Net Gain or (Loss) Including FA. You have already made Reclass Entry #5 to reclassify this amount as follows:

GL ACCT# Description Debit Credit
600 Net gain or (loss) on sales
including FA 		$ 15,000  
608 Income (loss) from US
Partnerships 		  $ 15,000

The amount of $15,000 will now appear on the M-3, Part II, line 9, column (a) as book income from US partnerships. However, the company received a K-1 from XYZ Partnership showing the following:

Ordinary Income: $ 6,000

Capital Gains: $ 7,000

Schedule M-3, Part II, line 9 should show the following:

Book
Column (a)		 Temp diff
(Column (b)		 Perm diff
(Column C)		 Tax Return
Column (d)
15,000   (2,000) 13,000

Column (c) is 15,000 - (6,000 + 7,000) = 2,000.

A new general ledger account, account #609, was set up to record partnership capital gains. This is because a separate TRC code must be assigned to partnership capital gains so that they will flow to a separate line on the 1120 tax return from the line to which the ordinary income, account #608, will flow. However, they will both receive the same MRC code, I180, as Schedule M-3 requires that all income from the partnership, whether capital gains or ordinary income, be recorded on Part II, line 9.

You entered Journal Entry #18 to reverse partnership book income in column (c) of line 9 as follows:

GL ACCT# Description Debit Credit  
608 Income (loss) from US
Partnerships 		$ 15,000   (1)
TAX60-450 Other book income not
included in return 		  $ 15,000 (1)

You entered Journal Entry #19 to record the K-1 amounts as follows:

GL ACCT# Description Debit Credit  
608 Income from
Partnership 		  $ 6,000 (1)
609 Partnership capital
gain/loss 		  $ 7,000 (1)
TAX60-450 Other book income not
on the return 		$ 13,000   (2)

Below is the effect of the above entries on the M-3:

  Book
Column (a)		 Temp diff
Column (b)		 Perm diff
Column (c)		 (Ref) Tax Return
Column (d)
Part II, line 9 15,000   (15,000) (1)  
    6,000 (1) 6,000
    7,000 (1) 7,000
 
15,000   ( 2,000)   13,000

Effect of the above entries on M-1:

    Ref
TAX60-450 (15,000) (2)
TAX60-450 13,000 (2)
 
  ( 2,000)  

In addition to the entries shown here, the system will post another M-1 adjustment. This entry is automatically made because the Automatic Journal Entry under the Options menu has been checked for Meals and Entertainment.

GL ACCT# Description Debit Credit
AUTO60-216 Travel and Entertainment $ 74,000  
AUTO41-810 Meals and Entertainment   $ 74,000

Because this is a return with an M-3, it is not recommended that the automatic journal entry be activated in the bridge for federal income tax. The M-3 requires the Federal Income Tax provision be broken out between current and deferred portions. The existing Federal Income Tax Provision account #1280 was used for the current portion of the provision and renamed, adding the word current to the account description. The account was mapped to the M-3 by assigning the MRC code #E550 to the account. A new account was set up, #1285, for the deferred portion of the provision and assigned MRC code #E560 and TRC code 41-400. Both accounts have the same TRC code 41-400, Federal Income Tax, but they have different MRC codes as they need to be mapped to different lines on the M-3, Part III. Tally, Inc., had recorded the entire Federal Income Tax provision of $56,000,000 to account #1280. You have already made the required entry to reclassify the provision between current and deferred by making reclass entry #4.

GL ACCT# Description Debit Credit
1285 Federal Income Tax -
Deferred 		$30,000,000  
1280 Federal Income Tax - Current   $30,000,000

This entry leaves a balance in account #1280 (Current portion) of $26,000,000 and a balance in account #1285 (Deferred portion) of $30,000,000. Then you made the M1/M3 entry #15 to record the book/ tax difference of both portions to both the M-1 and M-3 as follows:

GL ACCT# Description Debit Credit
TAX60-110 Federal Income Tax
(Makes the entry to M-1, line 2) 		$56,000,000  
1280 Federal Income Tax Provision - Current
(Posts to M-3, Part III, line 1, column (c)) 		  $26,000,000
1285 Federal Income Tax Provision - Deferred
(Posts to M-3, Part III, line 2, column (c)) 		  $30,000,000

The entry was marked as a permanent difference.

As both accounts are coded to TRC 41-400, the credits to accounts #1280 and #1285 bring the Federal Income Tax account to zero, so that the amounts will not post on page 1 of the Form 1120 as an expense.

As an option, you could make the entries directly in the M-3 organizer screens after merging the bridge with the entire Federal Income Tax Provision in the original single account #1280. But in order for the total amount to populate the M-3, Part III, line 1, you must assign an MRC code to the account on the grid. Then you would break up the bridged amount between current and deferred and override the bridged amount in the M-3 organizer. Then enter the same amounts in column (c) of Part III, lines 1 and 2, as negative amounts. As the automatic journal entry would be turned off, you would also need to enter the Federal Income Tax add back for the M-1, line 2 in the Organizer.

Now calculate the information.

  1. Verify that the information is in balance.
  2. Press F9 to calculate all of the information you have imported and entered.
  3. Once the compute is complete, select View > Tax Summary. You should have no differences.
  4. Verify that the data is in balance.
  5. Close the Tax Summary.
  6. Select Options > Merge Now.
  7. Exit the Bridge Application.

 

 

 

Case Study Facts/tally_using_tbb.htm/TY2019

Last Modified: 03/19/2020

Last System Build: 06/17/2021

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