for 2018 in excel spreadsheet 1 reconcile book income to taxable income and identify each book tax difference as temporary or permanent 2 compute xyz s income tax liability

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XYZ corp.

Book to Tax

Income statement

Book

Adjustments

Taxable

For current year

Income

(Dr.)

Cr.

Income

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

300,0001

Interest income

20,0002

Capital gains (losses)

(4,000)

Gain or loss from disposition of fixed assets

3,0003

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

(720,000)13

Net Income after taxes

$1,259,00014


Notes:

  • ABC owns 30% of the outstanding GreatSands Corp. (GS) stock. GreatSands Corp. reported $1,000,000 of income for the year. ABC accounted for its investment in GL under the equity method and it recorded its pro rata share of GS’s earnings for the year. GS also distributed a $200,000 dividend to ABC.
  • Of the $20,000 interest income, $5,000 was from a Seattle City bond (issued in 2017), $7,000 was from a Jacksonville City bond issued in 2015, $6,000 was from a fully taxable corporate bond, and the remaining $2,000 was from a money market account.
  • This gain is from equipment that ABC purchased in February and sold in December (i.e., it does not qualify as §1231 gain).
  • This includes total officer compensation of $2,500,000 (no one officer received more than $1,000,000 compensation).
  • This amount is the portion of incentive stock option compensation that vested during the year (recipients are officers).
  • ABC actually wrote off $27,000 of its accounts receivable as uncollectible.
  • Tax depreciation was $1,900,000.
  • In the current year, ABC did not make any actual payments on warranties it provided to customers.
  • ABC made $500,000 of cash contributions to qualified charities during the year.
  • On July 1 of this year ABC acquired the assets of another business. In the process it acquired $300,000 of goodwill. At the end of the year, ABC wrote off $30,000 of the goodwill as impaired.
  • ABC expensed all of its organizational expenditures for book purposes. It expensed the maximum amount of organizational expenditures allowed for tax purposes.
  • The other expenses do not contain any items with book-tax differences.
  • This is an estimated tax provision (federal tax expense) for the year. Assume that ABC is not subject to state income taxes.
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