Question

EFG, a calendar year, accrual basis corporation, reported $479,900 net income after tax on its financial statements prepared in accordance with GAAP. The corporation’s financial records reveal the following information:

• EFG earned $10,700 on an investment in tax-exempt municipal bonds.
• EFG’s allowance for bad debts as of January 1 was $21,000. Write-offs for the year totaled $4,400, while the addition to the allowance was $3,700. The allowance as of December 31 was $20,300.
• On August 7, EFG paid a $6,000 fine to a municipal government for a violation of a local zoning ordinance.
• EFG’s depreciation expense per books was $44,200, and its MACRS depreciation deduction was $31,000.
• This is EFG’s second taxable year. In its first taxable year, it recognized an $8,800 net capital loss. This year, it recognized a $31,000 Section 1231 gain on the sale of equipment. This was EFG’s only disposition of noninventory assets.
• In its first taxable year, EFG capitalized $6,900 organizational costs for tax purposes and elected to amortize the costs over 180 months. For book purposes, it expensed the costs.
• EFG’s federal income tax expense per books was $151,000.

Answer 1

a. Compute EFG's taxable income and regular tax.

$479,900 (10,700) EFG's net income per books Tax-exempt income Bad debt expense per books Bad debt deduction (write-offs) $3,700 (4,400) (700) 6,000 Nondeductible fine Book depreciation expense MACRS depreciation $44,200 (31,000) Capital loss carryforward deduction Amortization of organizational costs Federal tax expense per books EFG's taxable income Tax rate EFG's regular tax 13,200 (8,800) (460) 151,000 $629,440 .21 $132,182

b. Prepare a Schedule M-1, page 5, Form 1120, reconciling EFG's book and taxable income.

Schedule M-1:

10,700 Schedule M-1 Reconciliation of Income (Loss) per Books With Income per Return Note: The corporation may be required to file Schedule M-3. See instructions. 1 Net income (loss) per books. 479,900 7 Income recorded on books this year 2 Federal income tax per books 151,000 not included on this return (itemize): 3 Excess of capital losses over capital gains Tax-exempt interest $ 10,700 4 Income subject to tax not recorded on books this year (itemize): 8 Deductions on this return not charged 5 Expenses recorded on books this year not against book income this year (itemize): deducted on this return (itemize): a Depreciation $ Depreciation 13,200 b Charitable contributions $ b Charitable contributions $ Bad Debts 700 с Travel and entertainment. $ CL CF 8,800 Amort 460 Fines_6,000 19,200 9 Add lines 7 and 8 6 Add lines 1 through 5 650, 100 10 Income (page 1, line 28)-line 6 less line 9 a 9,960 20,660 629,440