Question

Timpanogos Inc. is an accrual-method calendar-year corporation. For 2019, it reported financial statement income after taxes of $1,152,000. Timpanogos provided the following information relating to its 2019 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
Cost of goods sold for book and tax purposes		300,000
Interest income on tax-exempt bonds issued in 2018		40,000
Interest paid on loan obtained to purchase tax-exempt bonds		45,000
Rental income payments received and earned in 2019		15,000
Rental income payments received in 2018 but earned in 2019		10,000
Rental income payments received in 2019 but not earned by year-end		30,000
Tax depreciation		55,000
Book Depreciation		25,000
Net capital loss		42,000
Federal income tax expense for books in 2019		500,000

Required:

1. 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.
2. Identify each book-tax difference as either permanent (P) or temporary (T).
3. Complete Schedule M-1 for Timpanogos.
4. Compute Timpanogos Inc.’s tax liability for 2019.

Answer 1

Description	Amount ($)	Temporarty/ Permanent difference	M-1 Adj
Book income	$          1,152,000.00
Add:
Premium paid on the key person life insurance policies, The policies have no cash surrender value	$                21,000.00	Permanent	$                21,000.00
Interest paid on loan obtained to purchase tax exempt bond	$                45,000.00	Permanent	$                45,000.00
Book depreciation	$                25,000.00	Temporary	$                25,000.00
Federal income tax expenses for books in 2019	$              500,000.00	Permanent	$              500,000.00
Net capital loss	$                42,000.00	Temporary	$                42,000.00
Rental income payments received in 2019 but not earned by year-end	$                30,000.00	Temporary	$                30,000.00
Charitable contribution	$              180,000.00	Temporary	$              180,000.00
			$                               -
Less:			$                               -
Life insurance proceeds as a result of CEO's Death	$            (200,000.00)	Permanent	$           (200,000.00)
Interest on tax exempt bonds issued in 2018	$              (40,000.00)	Permanent	$              (40,000.00)
Tax depreciation	$              (55,000.00)	Temporary	$              (55,000.00)
Rental income payments received and earned in 2019	$              (10,000.00)	Temporary	$              (10,000.00)
Charitable contribution	$            (169,000.00)	Temporary	$           (169,000.00)
Taxable income	$          1,521,000.00		$              369,000.00
Tax liability @21%	$              319,410.00
Calculation of allowable charitable contribution
Taxable income before charitable contribution (highlighted numbers)	$          1,690,000.00
Allowable charitable deduction-10%	$              169,000.00