Question

Timpanogos Inc. is an accrual-method calendar-year corporation. For 2017, it reported financial statement income after taxes of $1,152,000. Timpanogos provided the following information relating to its 2017 activities:

Life insurance proceeds as a result of CEO’s death	$	200,000
Revenue from sales (for both book and tax purposes)		2,000,000
Premiums paid on the key-person life insurance policies. The policies have no cash surrender value.		21,000
Charitable contributions		180,000
Overhead costs that were expensed for book purposes but are included in ending inventory for tax purposes under §263A		50,000
Overhead costs that were expensed for book purposes in 2016 but were included in 2016 ending inventory. All 2016 ending inventory was sold in 2017.		60,000
Cost of goods sold for book purposes		300,000
Interest income on private activity tax-exempt bonds issued in 2016.		40,000
Interest paid on loan obtained to purchase tax-exempt bonds		45,000
Rental income payments received and earned in 2017		15,000
Rental income payments received in 2016 but earned in 2017		10,000
Rental income payments received in 2017 but not earned by year-end		30,000
MACRS depreciation		55,000
Book Depreciation		25,000
Alternative minimum tax depreciation		50,000
Net capital loss		42,000
Federal income tax expense for books in 2017		500,000

Timpanogos did not qualify for the domestic production activities deduction.

Required:

Reconcile book income to taxable income for Timpanogos Inc. Be sure to start with book income.

Identify each book-tax difference as either permanent (P) or temporary (T).

a & b. Reconcile book income to taxable income for Timpanogos Inc. Be sure to start with book income and identify all of the adjustments necessary to arrive at taxable income. Identify each book-tax difference as either permanent (P) or temporary (T). (Negative amounts should be indicated by a minus sign.)

Description Book Income Book-tax adjustments Taxable Income (Dr) Cr (Dr) Cr (Dr) Cr Revenue from sales Cost of goods sold Gross profit Other income: Life insurance proceeds from CEO’s death Interest income on tax-exempt bonds Rental income Gross income Expenses: Interest paid to obtain tax-exempt bonds Net capital loss Depreciation Life insurance premiums Federal income tax expense Total expenses before charitable contribution, NOL, DRD, and DPAD deduction Income before charitable contribution, NOL, DRD, and DPAD NOL carryover from prior year Taxable income for charitable contribution limitation purposes Charitable contributions Book/Taxable income

Answer 1

Description	Book Income	Book-tax adjustments				Taxable Income
	(Dr) Cr	(Dr)		Cr		(Dr) Cr
Revenue from sales	$       2,000,000					$          2,000,000
Cost of goods sold	$         (300,000)	$      (60,000)	T	$               50,000	T	$           (310,000)
Gross profit	$       1,700,000					$          1,690,000
Other income:
Life insurance proceeds from CEO’s death	$           200,000	$    (200,000)	P			$                         -
Interest income on tax-exempt bonds	$             40,000	$      (40,000)	P			$                         -
Rental income	$             25,000	$      (10,000)	T	$               30,000	T	$                45,000
Gross income	$       1,965,000					$          1,735,000
Expenses:
Interest paid to obtain tax-exempt bonds	$           (45,000)			$               45,000	P	$                         -
Net capital loss	$           (42,000)			$               42,000	T	$                         -
Depreciation	$           (25,000)	$      (30,000)	T			$             (55,000)
Life insurance premiums	$           (21,000)			$               21,000	P	$                         -
Federal income tax expense	$         (500,000)			$             500,000	P	$                         -
Total expenses before charitable contribution, NOL, DRD, and DPAD deduction	$         (633,000)					$             (55,000)
Income before charitable contribution, NOL, DRD, and DPAD	$       1,332,000					$          1,680,000
NOL carryover from prior year
Taxable income for charitable contribution limitation purposes
Charitable contributions	$         (180,000)			$               12,000	T	$           (168,000)
Book/Taxable income	$       1,152,000					$          1,512,000

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