Question

Fallow Corporation is subject to tax only in State X. State income taxes are not deductible for State X income tax purposes. Fallow generated the following income and deductions:

Sales $4,000,000 Cost of sales 2,800,000 State X income tax expense 200,000 Depreciation allowed for Federal tax purposes 400,000 Depreciation allowed for state tax purposes 250,000 Interest income on Federal obligations 40,000 Interest income on State X obligations 30,000 Expenses related to carrying State X obligations 2,000

a. The starting point in computing the State X income tax base is Federal taxable income, which is $.

b. If the interest on State X's obligations is exempt from State X's income tax, Fallow's State X taxable income is $.

c. If the interest on State X's obligations is subject to State X's income tax, Fallow's State X taxable income is $.

Answer 1

Ans: A).

Particulars	Amount($)
Sales	$4,000,000
Add: Interest income on federal obligation	40,000
Less: Cost of sales	(2,800,000)
Less: Depreciation	(400,000)
Less: Income tax expense of X	(200,000)
Less: Expense related to carrying X obligations	(2,000)
Net federal taxable income	638,000

B). Since, the interest on State X's obligations is exempt from State X's income tax therefore interest income will not be included

Particulars	Amount($)
Federal Taxable income	638,000
Add: Income tax expense	200,000
Add expense related to carrying X obligations	2,000
Less: Depreciation	(250,000)
Less: Interest income on federal obligations	(40,000)
Net taxable income of X state	550,000

C ).Since, the interest on State X's obligations is Subject to  State X's income tax therefore interest income will not be included

Particulars	Amount($)
Federal Taxable income	638,000
Add: Income tax expense	200,000
Add expense related to carrying X obligations	2,000
Add: interest income	30,000
Less: Depreciation	(250,000)
Less: Interest income on federal obligations	(40,000)
Net taxable income of X state	580,000