Timpanogos Inc. is an accrual-method calendar-year corporation. For 2017, it rep

Question

Timpanogos Inc. is an accrual-method calendar-year corporation. For 2017, it reported financial statement income after taxes of $1,152,000. Timpanogos provided the following information relating to its 2017 activities:

Timpanogos did not qualify for the domestic production activities deduction.

Required:

Reconcile book income to taxable income for Timpanogos Inc. Be sure to start with book income.

Identify each book-tax difference as either permanent (P) or temporary (T).

a & b. 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. Identify each book-tax difference as either permanent (P) or temporary (T). (Negative amounts should be indicated by a minus sign.)

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 Overhead costs that were expensed for book purposes but are included in ending inventory for tax purposes under §263A 50,000 Overhead costs that were expensed for book purposes in 2016 but were included in 2016 ending inventory. All 2016 ending inventory was sold in 2017. 60,000 Cost of goods sold for book purposes 300,000 Interest income on private activity tax-exempt bonds issued in 2016. 40,000 Interest paid on loan obtained to purchase tax-exempt bonds 45,000 Rental income payments received and earned in 2017 15,000 Rental income payments received in 2016 but earned in 2017 10,000 Rental income payments received in 2017 but not earned by year-end 30,000 MACRS depreciation 55,000 Book Depreciation 25,000 Alternative minimum tax depreciation 50,000 Net capital loss 42,000 Federal income tax expense for books in 2017 500,000

Explanation / Answer

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Description Book Income Book-tax adjustments Taxable Income (Dr) Cr (Dr) Cr (Dr) Cr Revenue from sales $       2,000,000 $          2,000,000 Cost of goods sold $         (300,000) $      (60,000) T $               50,000 T $           (310,000) Gross profit $       1,700,000 $          1,690,000 Other income: Life insurance proceeds from CEO’s death $           200,000 $    (200,000) P $                         -   Interest income on tax-exempt bonds $             40,000 $      (40,000) P $                         -   Rental income $             25,000 $      (10,000) T $               30,000 T $                45,000 Gross income $       1,965,000 $          1,735,000 Expenses: Interest paid to obtain tax-exempt bonds $           (45,000) $               45,000 P $                         -   Net capital loss $           (42,000) $               42,000 T $                         -   Depreciation $           (25,000) $      (30,000) T $             (55,000) Life insurance premiums $           (21,000) $               21,000 P $                         -   Federal income tax expense $         (500,000) $             500,000 P $                         -   Total expenses before charitable contribution, NOL, DRD, and DPAD deduction $         (633,000) $             (55,000) Income before charitable contribution, NOL, DRD, and DPAD $       1,332,000 $          1,680,000 NOL carryover from prior year Taxable income for charitable contribution limitation purposes Charitable contributions $         (180,000) $               12,000 T $           (168,000) Book/Taxable income $       1,152,000 $          1,512,000

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