Question

In 2017, the Cannon Corporation recorded a book income before taxes of $64,800,000. The company’s depreciation expense was less than government cost-recovery by $8,000,000. A payment the company made that year for a charitable contribution of $22,000,000 was deductible for tax purposes only to the extent of $7,000,000. Cannon also had a net operating loss carryforward to 2018 of $17,000,000. Cannon had the following transactions and circumstances during 2018: • Effective January 2, 2018, Cannon made a 40% investment in the Fuse Technologies Company. Fuse’s net income for calendar-year 2018 was $90,000,000. • Cannon earned interest of $7,600,000 on tax-exempt bond investments. • On May 1, 2018, Cannon sold a building in which It had a carrying value of $66,000,000 for $52,000,000 in cash. • On June 30, 2018, Cannon purchased 100% of the capital stock of Shell Electronics Co. for $150,000,000, at a time when the fair value of the stock was $120,000,000. The tax authorities permit a level annual cost recovery of goodwill over 15 years. The management of Cannon found no impairment of value in its investment in Shell Electronics in 2018. • In August 2018, Cannon had to pay $12,000,000 to the tax authorities, based on a miscalculation of prior years’ taxes. This payment included interest of $1,000,000. • Cannon’s expense for import duties in 2018 was $15,200,000. The company will be permitted one-half of that amount as a deduction in 2018, with no carry-over to future years. • In September 2018, Cannon was notified that the courts had determined that a $20,000,000 ‘marketing” payment made during 2018 to a company in the country of Concretia was illegal under the requirements of the U.S. Foreign Corrupt Practices Act. Later that month, Cannon was notified of a court decision that a similar payment made in 2017 to a company in Grand Wachovia, for $18,000,000, was also illegal. • For 2018, accelerated cost recovery of $36,600,000 was allowed for tax purposes on Cannon’s property, plant and equipment. Depreciation determined using generally accepted accounting principles was $49,200,000. • Two-thirds of the carry-over of the 2017 charitable contribution was available as a deduction in 2018. • At December 31, 2018, Cannon’s management made a calculation of earnings before taxes of $200,000,000. However, an accounting error was subsequently discovered (an expense of $16,000,000 had been improperly capitalized as an asset) and was corrected. Prepare a schedule for the computation of taxable income for Cannon Corporation for 2018.

Answer 1

Calculation of Taxable income of cannon incorporaton for 2018

EBIT	$200000000
Less:Carry forward losses 2017(note 1)	($20000000)
Add: Interest On income Taxes	$1000000
Add:Custome Duty Paid (note 2)	$760000
Taxable income for cannon corporation	$169240000

Note 1

Carry Forward Lossess 2017 =$22000000-$7000000=$15000000

=$17000000-$15000000

=$2000000

Add; Payment made to Grand Wachovia illegal =$18000000

Total Carry forward losses- $20000000

NOte 2

customes duty Allowed only half amount add back to profit $760000(15200000/2)

• Dontaions Paid Allowed one third in 2017 and remaing two third in next year.
• Remaning All Adjustments made before EBIT Calculations in 2018.