Question

In: Accounting

XYZ is a calendar-year corporation that began business on January 1, 2020. For the year, it...

XYZ is a calendar-year corporation that began business on January 1, 2020. For the year, it reported the following information in its current-year audited income statement. Notes with important tax information are provided below. Use Exhibit 16-6.

XYZ corp. Book
Income
Income statement
For current year
Revenue from sales $ 40,000,000
Cost of Goods Sold (27,000,000 )
Gross profit $ 13,000,000
Other income:
Income from investment in corporate stock 300,000 1
Interest income 20,000 2
Capital gains (losses) (4,000 )
Gain or loss from disposition of fixed assets 3,000 3
Miscellaneous income 50,000
Gross Income $ 13,369,000
Expenses:
Compensation (7,500,000 )4
Stock option compensation (200,000 )5
Advertising (1,350,000 )
Repairs and Maintenance (75,000 )
Rent (22,000 )
Bad Debt expense (41,000 )6
Depreciation (1,400,000 )7
Warranty expenses (70,000 )8
Charitable donations (500,000 )9
Meals (18,000 )
Goodwill impairment (30,000 )10
Organizational expenditures (44,000 )11
Other expenses (140,000 )12
Total expenses $ (11,390,000 )
Income before taxes $ 1,979,000
Provision for income taxes (400,000 )13
Net Income after taxes $ 1,579,000
  1. XYZ owns 30 percent of the outstanding Hobble Corp. (HC) stock. Hobble Corp. reported $1,000,000 of income for the year. XYZ accounted for its investment in HC under the equity method, and it recorded its pro rata share of HC’s earnings for the year. HC also distributed a $200,000 dividend to XYZ.
  2. Of the $20,000 interest income, $5,000 was from a City of Seattle bond, $7,000 was from a Tacoma City bond, $6,000 was from a fully taxable corporate bond, and the remaining $2,000 was from a money market account.
  3. This gain is from equipment that XYZ purchased in February and sold in December (i.e., it does not qualify as §1231 gain).
  4. This includes total officer compensation of $2,500,000 (no one officer received more than $1,000,000 compensation).
  5. This amount is the portion of incentive stock option compensation that was expensed during the year (recipients are officers).
  6. XYZ actually wrote off $27,000 of its accounts receivable as uncollectible.
  7. Tax depreciation was $1,900,000.
  8. In the current year, XYZ did not make any actual payments on warranties it provided to customers.
  9. XYZ made $500,000 of cash contributions to qualified charities during the year.
  10. On July 1 of this year XYZ acquired the assets of another business. In the process, it acquired $300,000 of goodwill. At the end of the year, XYZ wrote off $30,000 of the goodwill as impaired.
  11. XYZ expensed all of its organizational expenditures for book purposes. XYZ expensed the maximum amount of organizational expenditures allowed for tax purposes.
  12. The other expenses do not contain any items with book–tax differences.
  13. This is an estimated tax provision (federal tax expense) for the year. Assume that XYZ is not subject to state income taxes.

Estimated tax information:

XYZ made four equal estimated tax payments totaling $360,000 ($90,000 per quarter). For purposes of estimated tax liabilities, assume XYZ was in existence in 2019 and that in 2019 it reported a tax liability of $500,000. During 2020, XYZ determined its taxable income at the end of each of the four quarters as follows:

Quarter-end Cumulative taxable income (loss)
First $ 400,000
Second $ 1,100,000
Third $ 1,400,000

Finally, assume that XYZ is not a large corporation for purposes of estimated tax calculations. (Do not round intermediate calculations. Round your answers to the nearest dollar amount.)

e. Determine the quarters for which XYZ is subject to underpayment of estimated tax penalties. (Round "Annualization Factor" for Fourth quarter to 2 decimal places.)


     

Solutions

Expert Solution

Answer :-

As per given data , Statement of the XYZ Company for the Financial year is as shown below-

DESCRIPTION

BOOK INCOME

BOOK -TAX ADJUSTMENTS

TAXABLE INCOME

(Dr) Cr

(Dr)

Cr

(Dr) Cr

Revenue from sales

$4,00,00,000

$ 4,00,00,000

Cost of Goods Sold

(2,70,00,000)

(2,70,00,000)

Gross Profit

$ 1,30,00,000

$ 1,30,00,000

Other Income:

Income from investment in corporate stock

3,00,000(1pt)

(1,00,000)[T]

2,00,000

Interest income

20,000

(12,000)[P]

8,000

Capital Gains (losses)

(4,000)

4,000[T]

0

Gain on fixed asset dispositions

3,000

3,000(2pt)

Miscellaneous income

50,000

50,000

Gross Income

$ 1,33,69,000

$ 1,32,61,000

Expenses:

Compernsation

(75,00,000)

(75,00,000)

Stock option compensation

(2,00,000)

(2,00,000)[P]

0

Advertising

(13,50,000)

(13,50,000)

Repairs and maintenance

(75,000)

(75,000)

Rent

(22,000)

(22,000)

Bad Debt expense

(41,000)

14,000[T]

(27,000)

Depreciation

(14,00,000)

(5,00,000)[T]

(19,00,000)

Warranty expenses

(70,000)

(70,000)[T]

0(3pt)

Charitable contributions

Moved below

Meals and entertainment

(18,000)

9,000[P]

(9,000)

Goodwill impairment

(30,000)

20,000[T]

(10,000)(4 pt)

Organizational expenditures

(44,000)

36,400[T]

(7,600)(5pt)

Other expenses

(1,40,000)

(1,40,000)

Federal income tax expenses

(7,20,000)

7,20,000[P]

0

Total expenses before charitable contribution ,NOL,DRD, and DPAD dedction

(1,16,10,000)

(1,10,40,600)

Income before charitable contribution DRD, and DPAD

$17,59,000

$22,20,400

Charitable contributions

(5,00,000)

2,77,960[T]

(2,22,040)(7pt)

Taxable income before DRD and DPAD

$19,98,360

Dividends Received Deduction (DRD)

(1,60,000)[P]

(1,60,000)

Domestic production activities deduction

(90,000)[P]

(90,000)

BOOK/TAXABLE INCOME

$12,59,000

(8,62,000)

13,51,360

$17,48,360

Explaination of the Points -

*[T] reflects temporary book-tax differences and [P] reflects permanent book-tax differences.

    1. Using the equity method, XYZ accounts for $1,00,000 of income for book purposes ($10,00,000 x .3).

2. This is ordinary income for tax purposes (used in trade or business held for less than a year) so it is not netted with the capital loss.

3. Warranty expense is deductible for tax purposes when paid.

4. For tax purposes, XYZ is allowed to amortize goodwill acquired in an asset acquisition on a straight-line basis over 180 months. In 2011, it is allowed to amortize goodwill for 6 months because the goodwill was acquired in July. Its deductible amortization expense for goodwill is $10,000 ($30,000/180 months x 6 months). So, the Schedule M-1 adjustment is $20,000 unfavorable.

5. Because XYZ reported less than $50,000 in organization expenditures it is allowed to immediately expense $5,000 and amortize the remaining costs $39,000 ($44,000 – 5,000) over 180 months (15 years). Because XYZ began business in January, it is allowed to deduct a full year’s worth of amortization. In total, its XYZ’s deductible amortization is $7,600 [$5,000 + 2,600 ($39,000/15)].

6. The charitable contribution deduction is limited to $2,22,040 which is 10% of taxable income before the charitable contribution, DRD, or DMD ($22,20,400 x 10%).

7. Because XYZ owns 30% of HC, it is entitled to an 80% DRD. Its DRD is $1,60,000 ($2,00,000 dividend x 80%).

b. XYZ’s regular income tax liability is $5,94,442 ($17,48,360 x 34%).

c. XYZ’s Schedule M-1 is as follows:

Schedule M-1

1

Net income per books

$12,59,000

2

Federal income tax provision

7,20,000

3

Excess of capital losses over capital gains

4,000

4

Income subject to tax not recorded on books this year (itemize)

5

Expenses recorded on books this year not deducted on this return

a. Depreciation

b. Contributions carryover

2,77,960

c. Travel and entertainment

9,000

Stock option compensation (incentive stock options)

2,00,000

Bad debt expense

14,000

Warranty expense

70,000

Goodwill impairment

20,000

Organizational expenditures

36,400

6

Add lines 1 through 5

$26,10,360

7

Income recorded on books this year not included on this return

a. Tax exempt interest

12,000

Income from investment in corporate stock

1,00,000

8

Deductions on this return not charged against book income this year

a. Depreciation

5,00,000

b. Contributions carryover

Domestic production activities deduction

90,000

9

Add lines 7 and 8

7,02,000

10

Income (line 28) – line 6 less line 9

$19,08,360

Note that line 10 does not reconcile to XYZ’s taxable income. It reconciles to taxable income before the dividends received deduction of $1,60,000. XYZ’s taxable income is $17,48,360 ($19,08,360 -1,60,000).

XYZ’s alternative minimum tax liability is $0, computed as follows

AMT Calculation

Category

Item/Calculation

Amount

Taxable income or loss before NOL deduction

$17,48,360

Preference items

Private activity bond

7,000

Adjustments

Depreciation

2,00,000

ACE adjustment

9,450

Alternative minimum taxable income (AMTI)

ekkarill92 answered 1 year ago
Next > < Previous

Related Solutions

XYZ is a calendar-year corporation that began business on January 1, 2018. For the year, it...
XYZ is a calendar-year corporation that began business on January 1, 2018. For the year, it reported the following information in its current-year audited income statement. Notes with important tax information are provided below. Use Exhibit 16-6. XYZ corp. Book Income Income statement For current year Revenue from sales $ 40,000,000 Cost of Goods Sold (27,000,000 ) Gross profit $ 13,000,000 Other income: Income from investment in corporate stock 300,000 1 Interest income 20,000 2 Capital gains (losses) (4,000 )...
XYZ is a calendar-year corporation that began business on January 1, 2018. For the year, it...
XYZ is a calendar-year corporation that began business on January 1, 2018. For the year, it reported the following information in its current-year audited income statement. Notes with important tax information are provided below. Use Exhibit 16-6. XYZ corp. Book Income Income statement For current year Revenue from sales $ 40,000,000 Cost of Goods Sold (27,000,000 ) Gross profit $ 13,000,000 Other income: Income from investment in corporate stock 300,000 1 Interest income 20,000 2 Capital gains (losses) (4,000 )...
XYZ is a calendar-year corporation that began business on January 1, 2018. For the year, it...
XYZ is a calendar-year corporation that began business on January 1, 2018. For the year, it reported the following information in its current-year audited income statement. Notes with important tax information are provided below. XYZ corp. Book Income Income statement For current year Revenue from sales $ 40,000,000 Cost of Goods Sold (27,000,000 ) Gross profit $ 13,000,000 Other income: Income from investment in corporate stock 300,000 1 Interest income 20,000 2 Capital gains (losses) (4,000 ) Gain or loss...
XYZ is a calendar-year corporation that began business on January 1, 2017. For 2017, it reported...
XYZ is a calendar-year corporation that began business on January 1, 2017. For 2017, it reported the following information in its current year audited income statement. Notes with important tax information are provided below. XYZ corp. Book Income Income statement For current year Revenue from sales $ 40,000,000 Cost of Goods Sold (27,000,000 ) Gross profit $ 13,000,000 Other income: Income from investment in corporate stock 300,000 1 Interest income 20,000 2 Capital gains (losses) (4,000 ) Gain or loss...
[The following information applies to the questions displayed below.] XYZ is a calendar-year corporation that began...
[The following information applies to the questions displayed below.] XYZ is a calendar-year corporation that began business on January 1, 2017. For 2018, it reported the following information in its current-year audited income statement. Notes with important tax information are provided below. Use Exhibit 16-6. XYZ corp. Book Income Income statement For current year Revenue from sales $ 40,000,000 Cost of Goods Sold (27,000,000 ) Gross profit $ 13,000,000 Other income: Income from investment in corporate stock 300,000 1 Interest...
XYZ Corporation began operations on January 1, 2019. The following information is available for XYZ Corporation...
XYZ Corporation began operations on January 1, 2019. The following information is available for XYZ Corporation on December 31, 2019. Accounts receivable 1,800 Common stock 10,000 Supplies 4,000 Accounts payable 2,000 Retained earnings ? Supplies expense 200 Rental expense 9,000 Equipment 16,000 Cash 1,400 Notes payable 5,000 Insurance expense 1,000 Dividends 600 Service revenue 17,000 Instructions Prepare an (1) income statement, (2) a retained earnings statement, and (3) a balance sheet using this information.
Grouper Corporation was incorporated and began business on January 1, 2020. It has been successful and...
Grouper Corporation was incorporated and began business on January 1, 2020. It has been successful and now requires a bank loan for additional capital to finance an expansion. The bank has requested an audited income statement for the year 2020 using IFRS. The accountant for Grouper Corporation provides you with the following income statement, which Grouper plans to submit to the bank: Grouper Corporation Income Statement Sales revenue $ 846,000 Dividend revenue 32,000 Gain on recovery of earthquake loss (unusual)...
XYZ Co. began operations on January 1, 2020. Financial statements for 2020 and 2021 contained the...
XYZ Co. began operations on January 1, 2020. Financial statements for 2020 and 2021 contained the following errors:                                         Dec. 31, 2020             Dec. 31, 2021         Ending inventory $198,000 overstated $219,000 understated      Depreciation expense 126,000 overstated               —                                                      No corrections have been made for any of the errors. Ignore income tax considerations. The total effect of the errors on the balance of XYZ’s retained earnings at December 31, 2021 is overstated or understated by          _______
XYZ Company began operations on January 1, 2020. The company has the following items included in...
XYZ Company began operations on January 1, 2020. The company has the following items included in the owners' equity section of its balance sheet. 8% Preferred Stock, $100 par, 100,000 shares authorized, 25,000 shares issued and outstanding $2,500,000 Common Stock, $3 par, 500,000 shares authorized; 150,000 shares issued and outstanding 450,000 Additional paid-in capital 2,250,000 Total dividends declared and paid were: 2020 $170,000 2021 210,000 2022 240,000 A. Referring to the information above, if XYZ Company's preferred stock were CUMULATIVE,...
At the beginning of the year, Miranda began a calendar-year business and placed in service the...
At the beginning of the year, Miranda began a calendar-year business and placed in service the following assets during the year: Date Cost Asset Placed in Service Basis Computers 1/30 $ 50,500 Office desks 2/15 $ 54,500 Machinery 7/25 $ 97,500 Office building 8/13 $ 430,000 Assuming Miranda elects out of bonus depreciation and does not elect §179 expensing , answer the following questions: (Use MACRS Table 1, Table 2, Table 3, Table 4 and Table 5.) (Do not round...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT