Question

Please answer part a and b for the following question.

PROBLEMS 3.13 E&P Computation. For its current taxable year. K Corporation, a manufactur of nuts and bolts, reported the following information using the accrual method of accounting: Income: Sales .... $575,000 Cost of goods sold (LIFO) ... (175,000) Gross profit from operations $400,000 Interest income: Municipal bonds 9,000 Corporate bonds 20,000 Dividends received 10,000 Ordinary income on installment sale .. 14,000 Life insurance proceeds 50,000 Expense: Selling and administrative expenses ......... 90,000 Amortization of organization expense 500 Fines for overweight trucks ..... 1,000 Depreciation....... 50,000 Long-term capital loss ........... 3,000 Net operating loss from prior year... 60,000 In addition to the information above, the company's records reveal: 1. Cost of goods sold using FIFO would have been $150,000. 2. The dividends were received from a 30% owned domestic corporation. 3. The installment sale income arose from the sale of land for $100.000 (basis $30,000): $20,000 cash was received this year. The income was ordinary due to previous reporting of net § 1231 losses. 4. Life insurance proceeds arose from the death of the company's chief execu- tive officer: K Corporation had paid the premiums on a term insurance policy covering the officer. 5. Organization expense represented amortization of total organization expense of $2,500. 6. Depreciation was computed using accelerated methods, straight-line deprecia tion using the appropriate recovery periods would have been $37,000. 7. Cash distributions to shareholders during the year were $12,000. Required: a. Compute K Corporation's taxable income. b. Compute K's current E&P.

Answer 1

Answer to a.

K Corporation
Computation of Taxable Income
Description	Amount $	Amount $	Remarks/Explanation
Net Income	3,46,769
Add: Depreciation (normal)	50,000		Depreciation calculations use a straight-line method that is generally longer than the accelerated depreciable lives permitted for regular tax purposes
	3,96,769
Less: Depreciation (accelerated)	37,000
	3,59,769	3,59,769
Add: Cash distribution to Shareholder	12,000		As Cash distribution to shareholder is a separate taxable concept, not included
		3,71,769
Less: Insurance Proceeds	50,000		Being Tax-exempt income it shall be reduced from the taxable income
Ordinary Income on Installment sale	10,000	60,000	Normal consideration on sale of asset not to be considered in taxable income
Net Taxable Income		3,11,769

Answer to b.

K Corporation
Statement of Earnings & Profits
Expenditure	Amount $	Amount $	Income	Amount $	Amount $
Cost of Goods (LIFO)	1,50,000		Sales		5,75,000
Change of Inventory	25,000	1,75,000
Gross Profit		4,00,000
		5,75,000			5,75,000
Selling and admn expenses		90,000	Gross Profit		4,00,000
Organization Expense		2,000	Interest Income		29,000
Fines on Overweight trucks		1,000	Dividends received		10,000
Depreciation		50,000	Life Insurance proceeds		50,000
Cash Distribution to shareholder		12,000	Ordinary Income on installment sale (Basis)	30,000
			Less: Cash already received	20,000	10,000
			Ordinary Income on installment sale	14,000
			Less: Normal Income already shown above	10,000
			Profit on the sale	4,000
Net Profit		3,46,769	Less: loss incurred in previous reporting	1,231	2,769
		5,01,769			5,01,769

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