Question

The ABC Company reported taxable income of $500,000 in 2018. The company paid $105,000 in federal taxes for 2018. If you start with taxable income of $500,000 what adjustment will be necessary for the $105,000 for purposes of calculating E&P?

a. a $105,000 addition. b. a $105,000 deduction. c. no adjustment. d. none of the above.

ABC Company reported taxable income of $500,000 in 2018. This amount does not include a $5,000 nondeductible (for tax purposes) meal expense. If you start with taxable income of $500,000 what adjustment will be necessary for the $5,000 meal expense for purposes of calculating E&P? a. a $5,000 addition. b. a $5,000 deduction. c. no adjustment. d. none of the above. 2 points QUESTION 22 ABC Company reported taxable income of $500,000 in 2018. This amount included a $15,000 deduction for tax depreciation. The company’s depreciation for E&P purposes was $12,000. If you start with taxable income of $500,000 what adjustment will you need to make for depreciation for purposes of calculating E&P?

a. a $3,000 addition. b. a $3,000 deduction. c. a $12,000 deduction. d. a $12, addition. e. none of the above.

ABC Company reported current year E&P of $400,000 in 2018. This amount included a $10,000 capital gain and $16,000 capital loss. If you start with E&P of $400,000 what adjustment will you need to make for capital losses for purposes of calculating taxable income?

a. a $6,000 addition. b. a $6,000 deduction. c. no adjustment. d. none of the above.

ABC Company reported current year E&P of $400,000 in 2018. This amount included a $12,000 expense for payment of an OSHA violation fine. If you start with E&P of $400,000 what adjustment will you need to make for the fine for purposes of calculating taxable income?

a. a $12,000 addition. b. a $12,000 deduction. c. no adjustment. d. none of the above.

ABC Company reported current year E&P of $400,000 in 2018. This amount included $100,00 of life insurance proceeds the company received because of the death of one of its officers (the company was the beneficiary of the officer’s life insurance policy). If you start with E&P of $400,000 what adjustment will you need to make for the life insurance proceeds for purposes of calculating taxable income?

a. a $100000 addition. b. a $100,000 deduction. c. no adjustment. d. none of the above.

ABC Company reported current year E&P of $400,000 in 2018. This amount included $4,000 of interest from municipal bonds. If you start with E&P of $400,000 what adjustment will you need to make for the municipal bond interest for purposes of calculating taxable income?

a. a $4,000 addition. b. a $4,000 deduction. c. no adjustment. d. none of the above.

ABC Company reported current year E&P of $400,000 in 2018. This amount included a state income tax expense of $7,000. If you start with E&P of $400,000 what adjustment will you need to make for the state income tax expense for purposes of calculating taxable income?

a. a $7,000 addition. b. a $7,000 deduction. c. no adjustment. d. none of the above.

Answer 1

ANSWER:

1)The answer is option (b) i.e $105000 will be deducted from taxable income of $500000

Explanation: definitions

(i) Taxable income: It is the profit(revenue less expenses) earned by the company on which tax is payable and calculated as per Tax laws.Therefore this amount is always inclusive of tax as tax is a payable as a percentage of taxable income.

( ii) Earnings and profit:Earnings and profits are calculated after deducting all the expenses incurred from the gross receipts /sales.

Therefore ,tax is an expenditure which the company has to incur and pay to the government.we can calculate the profits available to the comapany only after deducting expenses.Hence we deduct $105000 from taxable income of $500000 to arrive at the earnings and profits.

2) The answer is option (b):

Explanation: taxable income is calculated after making adjustments required by tax laws.In this case tax law do not allow the expenditure of $5000 to be deducted.However to arrive at earnings and profits this expenditure needs to be deducted as the company has incurred the expenditure.In calculation of the taxable income the expenditure of $5000 has not been deducted(not considered at all-as if it has never been incurred).Therefore to arrive at correct earnings & profits we need to deduct the expenditure of $5000.

3)The answer is(a)

Explanation:taxable income is calculated after making adjustments required by tax laws.In this case tax law allow deduction of $15000 whereas as per accounting principles only $12000 deduction is allowed.Therefore $3000 is the excess deduction allowed by tax laws.In order to reach the earnings and profits we need to add $3000 to nullify the excess deduction taken while calculating taxable income.

4)The answer is (a)

Explanation:The net capital loss is $6000(16000-10000).It is non deductible as per tax laws.hence it should be added back to nullify the effect of the deduction taken in calculation of the earnings to reach taxable profits

5)The answer is (a):

Explanation: fine paid for violation of law is a non deductible expenditure as per tax laws.However it is deducted to calculate earnings and profits .To nullify the effect of  deduction we need to add $12000 from the earnings to reach taxable profits.This will increase the taxable profit.

6) The answer is (b):

Explanation: Life insurance proceeds are exempt from taxation i.e no tax will be levied on the income received from insurance policy.Therefore to arrive at taxable profits $100000 will be deducted from the earnings and profits.

7)The answer is (b):

Explanation: Interest on municipal bonds is exempt from tax i.e no tax will be levied on the income received from municipal bonds.As the earnings include the income from municipal bonds ,to arrive at the taxable income ,we need to deduct $4000 from the earnings and profits.

8)The answer is (a):

Explanation: deduction of state income tax expense is disallowed as per the tax laws,however it is deducted to calculate earnings and profits.To reach taxable income we need to nullify the effect of the deduction made to earnings by adding $ 7000 to reach taxable profits.

Summary:

if starting point is earnings and profits:

expense disallowed as per tax law= add expense to earnings and profits. income disallowed as per tax law/exempt=deduct income from earnings and expense.

if starting point is taxable income:

expense disallowed as per tax law= deduct expense from taxable income income disallowed as per tax law/exempt=add income to taxable income