[The following information applies to the questions displayed below.]
XYZ is a calendar-year corporation that began business on January 1, 2018. For the year, it reported the following information in its current-year audited income statement. Notes with important tax information are provided below. Use Exhibit 16-6.
XYZ corp. | Book Income |
||
Income statement | |||
For current year | |||
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 | 300,000 | 1 | |
Interest income | 20,000 | 2 | |
Capital gains (losses) | (4,000 | ) | |
Gain or loss from disposition of fixed assets | 3,000 | 3 | |
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 | $ | 1,259,000 | 14 |
Notes:
Estimated tax information:
XYZ made four equal estimated tax payments totaling $480,000. For purposes of estimated tax liabilities, assume XYZ reported a tax liability of $800,000 in 2018. During 2019, XYZ determined its taxable income at the end of each of the four quarters as follows:
Quarter-end | Cumulative taxable income (loss) | ||
First | $ | 350,000 | |
Second | $ | 800,000 | |
Third | $ | 1,000,000 | |
Finally, assume that XYZ is not a large corporation for purposes of estimated tax calculations. (Do not round intermediate calculations. Round your answers to the nearest dollar amount.)
A) Compute XYZ's Taxable income
B)Compute XYZ's Tax Liability
C)Complete XYZ's Schedule M-1
D) Compute XYZ's Form 1120, Page 1
E) Determine the quarters for which XYZ is subject to underpayment of estimated tax penelties
Compute XYZ’s taxable income.
Description |
Book |
Book-tax adjustments |
Taxable |
||||||||||
(Dr) |
Cr |
||||||||||||
Revenue from sales |
$ |
40,000,000 |
$ |
40,000,000 |
|||||||||
Cost of Goods Sold |
(27,000,000 |
) |
(27,000,000 |
) |
|||||||||
Gross profit |
$ |
13,000,000 |
$ |
13,000,000 |
|||||||||
Other income: |
|||||||||||||
Income from investment in corporate stock |
300,000 |
1 |
(100,000 |
) |
[T] |
200,000 |
|||||||
Interest income |
20,000 |
(12,000 |
) |
[P] |
8,000 |
||||||||
Capital gains (losses) |
(4,000 |
) |
4,000 |
[T] |
0 |
||||||||
Gain on fixed asset dispositions |
3,000 |
3,000 |
2 |
||||||||||
Miscellaneous income |
50,000 |
50,000 |
|||||||||||
Gross Income |
$ |
13,369,000 |
$ |
13,261,000 |
|||||||||
Expenses: |
|||||||||||||
Compensation |
(7,500,000 |
) |
(7,500,000 |
) |
|||||||||
Stock option compensation |
(200,000 |
) |
200,000 |
[P] |
0 |
||||||||
Advertising |
(1,350,000 |
) |
(1,350,000 |
) |
|||||||||
Repairs and Maintenance |
(75,000 |
) |
(75,000 |
) |
|||||||||
Rent |
(22,000 |
) |
(22,000 |
) |
|||||||||
Bad debt expense |
(41,000 |
) |
14,000 |
[T] |
(27,000 |
) |
|||||||
Depreciation |
(1,400,000 |
) |
(500,000 |
) |
[T] |
(1,900,000 |
) |
||||||
Warranty expenses |
(70,000 |
) |
70,000 |
[T] |
0 |
3 |
|||||||
Meals |
(18,000 |
) |
9,000 |
[P] |
(9,000 |
) |
|||||||
Goodwill impairment |
(30,000 |
) |
20,000 |
[T] |
(10,000 |
)4 |
|||||||
Organizational expenditures |
(44,000 |
) |
36,400 |
[T] |
(7,600 |
)5 |
|||||||
Other expenses |
(140,000 |
) |
(140,000 |
) |
|||||||||
Federal income tax expense |
(720,000 |
) |
720,000 |
[P] |
0 |
||||||||
Total expenses before charitable contribution, NOL, and DRD |
(11,610,000 |
) |
(11,040,600 |
) |
|||||||||
Income before charitable contribution and DRD |
$ |
1,759,000 |
$ |
2,220,400 |
|||||||||
Charitable contributions |
(500,000 |
) |
277,960 |
[T] |
(222,040 |
)6 |
|||||||
Taxable income before DRD |
$ |
1,998,360 |
|||||||||||
Dividends received deduction (DRD) |
(130,000 |
) |
[P] |
(130,000 |
)7 |
||||||||
Book/Taxable income |
$ |
1,259,000 |
(742,000 |
) |
1,351,360 |
$ |
1,868,360 |
||||||
*[T] reflects temporary book-tax differences and [P] reflects permanent book-tax differences.
Explanation:
XYZ’s income tax liability is $392,356 ($1,868,360 × 21%).
d. Complete XYZ’s Form 1120, page 1
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