Question

Grim Corporation has income and expenses for its current fiscal year, recorded under generally accepted accounting principles, as shown in the following schedule. In addition, a review of Grim’s books and records reveals the following information:

GAAP Book  

Income Sales revenue$2,000,000

Cost of goods sold (1,200,000)

Gross profit$800,000 Meals and entertainment expense (100,000)

Bad debt expense (30,000)

Depreciation expense (80,000)

Other operating expenses (220,000)

Contingent loss (50,000)

Income before taxes$320,000

Federal income tax expense (80,000)

Net income$240,000

• Grim expensed, for book purposes, meals totaling $46,000 and entertainment costs totaling $54,000. These costs were incurred by Grim sales personnel, are reasonable in amount, and are documented in company records.
• During January of the current year, Grim was sued by one of its employees as a result of a work-related accident. The suit has not yet gone to court. However, Grim’s auditors required the company to record a contingent liability (and related book expense) for $50,000, reflecting the company’s likely liability from the suit.
• Grim recorded federal income tax expense for book purposes of $80,000.
• Grim used the reserve method for calculating bad debt expenses for book purposes. Its book income statement reflects bad debt expense of $30,000, calculated as 1.5 percent of sales revenue. Actual write-offs of accounts receivable during the year totaled $22,000.
• MACRS depreciation for the year totals $95,000.
  

1. Complete the following table, reflecting Grim’s book/tax differences for the current year, whether such differences are positive (increase taxable income) or negative (decrease taxable income), and the final numbers to be included in the calculation of taxable income on Grim’s tax return.
2. Prepare a Schedule M-1, page 6, Form 1120, reconciling Grim’s book and taxable income.

Complete the following table, reflecting Grim’s book/tax differences for the current year, whether such differences are positive (increase taxable income) or negative (decrease taxable income), and the final numbers to be included in the calculation of taxable income on Grim’s tax return. (Negative amounts should be indicated by a minus sign. Leave no cells blank - be certain to enter "0" wherever required.)

required.)

	GAAP Book Income Book/Tax Differences Taxable Income Sales revenue $2,000, $0 $2,000,000 Cost of goods sold (1,200,000) 0 (1,200,000) Gross profit $800,000 $0 $800,000 Meals and entertainment expense (100,000) not attempted (100,000) Bad debt expense (30,000) 8,000 (22,000) Depreciation expense (80,000) (15,000) 95,000 Other operating expenses (220,000) 0 (220,000) Contingent loss (50,000) 50,000 0 Income before taxes $320,000 $43,000 $363,000 Federal income tax expense 80,000 not attempted 80,000 Net income $240,000 $43,000 $443,000

Answer 1

a.

b.

Schedule M-1: