Question

EFG, a calendar year, accrual basis corporation, reported $479,900 net income after tax on its financial statements prepared in accordance with GAAP. The corporation’s financial records reveal the following information: EFG earned $10,700 on an investment in tax-exempt municipal bonds. EFG’s allowance for bad debts as of January 1 was $21,000. Write-offs for the year totaled $4,400, while the addition to the allowance was $3,700. The allowance as of December 31 was $20,300. On August 7, EFG paid a $6,000 fine to a municipal government for a violation of a local zoning ordinance. EFG’s depreciation expense per books was $44,200, and its MACRS depreciation deduction was $31,000. This is EFG’s second taxable year. In its first taxable year, it recognized an $8,800 net capital loss. This year, it recognized a $31,000 Section 1231 gain on the sale of equipment. This was EFG’s only disposition of noninventory assets. In its first taxable year, EFG capitalized $6,900 organizational costs for tax purposes and elected to amortize the costs over 180 months. For book purposes, it expensed the costs. EFG’s federal income tax expense per books was $151,000.

A. Compute EFG’s taxable income and regular tax.

B. Prepare a Schedule M-1, page 6, Form 1120, reconciling EFG’s book and taxable income.

Answer 1

(A) EFG'S TAXABLE INCOME AND REGULAR TAX-

	PARTICULARS	AMOUNT (IN $)
	Net profit after tax	479900
Add	Federal income tax	151000
Add	Interest from tax free bonds	10700
Less	Bad debt allowed (3700+4400)	8100
Less	Fine from Government	6000
Less	Depreciation	44200
less	Loss on sale of asset	8800

	Profit after Deduction	574500
Add	Bad debt Recovered	7400
add	Gain from sale of asset	31000
	NET TAXABLE INCOME	612900

TAX ON NET TAXABLE INCOME- TAXABLE INCOME * TAX RATE

Therefore, Tax = 612900* 30%

=183870 $

(B) SCHEDULE M-1 FROM FORM-1120 RECOCCILING EFG'S BOOK AND TAX INCOME:-

	PARTICULARS	AMOUNT (IN $)
	Net Income after Tax	479900
ADD	Items that decreased net income as per Books but does not effect Taxable Income
	federal Income Tax as per books	151000
	Excess of capital Loss over Capital Gain (31000-8800)	22200
	Non deductible Expenses ( Government fine )	6000
	SUBTOTAL OF ADDITIONS	179200
LESS	Items that increased net income as per books but did not effect Taxable income
	Tax exempt Interest Income	10700
	Excess of MARCS Depreciation over Book depreciation (44200-31000)	13200
	TAXABLE INCOME	635200