Micro, an accrual basis corporation, reported $505,100 net income before tax on

Question

Micro, an accrual basis corporation, reported $505,100 net income before tax on its financial statements prepared in accordance with GAAP. Micro’s records reveal the following information:

Micro paid $25,000 in legal fees and $100,000 to a former employee to settle a claim of sexual harassment. To avoid negative publicity, Micro insisted that the settlement include a confidentiality agreement.

Late in the year, Micro entered into a five-year licensing agreement with an unrelated firm. The agreement entitles the firm to use a Micro trade name in marketing its own product. In return, the firm will pay Micro an annual royalty of 1 percent of gross revenues from sales of the product. The firm paid a $40,000 advanced royalty to Micro on the day the agreement was finalized. For financial statement purposes, this prepayment was credited to an unearned revenue account.

At its final meeting for the year, Micro’s board of directors authorized a $15,500 salary bonus for the corporation’s president to reward him for an outstanding performance. Micro paid the bonus on January 12. The president doesn’t own enough Micro stock to make him a related party for federal tax purposes.

Micro was incorporated last year. On its first tax return, it reported a $21,400 net operating loss.

Compute Micro's taxable income by showing the adjustments to book income to arrive at taxable income.

Check my work mode : This shows what is correct or incorrect for the work you have completed so far. It does not indicate completion Return to question 6 Micro, an accrual basis corporation, reported $505,100 net income before tax on its financial statements prepared in accordance with GAAP. Micro's records reveal the following information: 6 points Micro paid $25,000 in legal fees and $100,000 to a former employee to settle a claim of sexual harassment. To avoid negative publicity, Micro insisted that the settlement include a confidentiality agreement. .Late in the year, Micro entered into a five-year licensing agreement with an unrelated firm. The agreement entitles the firm to use a Micro trade name in marketing its own product. In return, the firm will pay Micro an annual royalty of 1 percent of gross revenues from sales of the product. The firm paid a $40,000 advanced royalty to Micro on the day the agreement was finalized. For financial statement purposes, this prepayment was credited to an unearned revenue account. At its final meeting for the year, Micro's board of directors authorized a $15,500 salary bonus for the corporation's president to reward him for an outstanding performance. Micro paid the bonus on January 12. The president doesn't own enough Micro stock to make him a related party for federal tax purposes. Micro was incorporated last year. On its first tax return, it reported a $21,400 net operating loss Compute Micro's taxable income by showing the adjustments to book income to arrive at taxable income (Amounts to be deducted should be indicated with a minus sign.) Answer is complete but not entirely correct Micro's net book income before tax Sexual harassment settlement and legal fees Prepaid royalty income Accrued bonus expense NOL carryforward deduction S 505,100 125,000 (40,000) (15,500) (21,400) Micro's taxable income $ 553,200

Explanation / Answer

Computation of Micro’s taxable income:

Particulars

Amount ($)

Explanation

Micro’s net income before tax

505,100

   Sexual harassment and legal fees

125,000

Sexual harassment and legal fees are a deductible expense on the gross income of the company.

   Prepaid royalty income

(32,000)

The agreement is for a period of 5 years out of which 1 year is the current year and hence unearned revenue account shall contain balance for 4 year only (40,000 * 4 years / 5 years)

   Accrued bonus expense

-

No treatment. No impact on the tax calculation.

   NOL carry forward deduction

(21,400)

Carry forward losses

Micro’s Taxable Income

576,700

Particulars

Amount ($)

Explanation

Micro’s net income before tax

505,100

   Sexual harassment and legal fees

125,000

Sexual harassment and legal fees are a deductible expense on the gross income of the company.

   Prepaid royalty income

(32,000)

The agreement is for a period of 5 years out of which 1 year is the current year and hence unearned revenue account shall contain balance for 4 year only (40,000 * 4 years / 5 years)

   Accrued bonus expense

-

No treatment. No impact on the tax calculation.

   NOL carry forward deduction

(21,400)

Carry forward losses

Micro’s Taxable Income

576,700

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