For the year ended December 31,2007, The Granite Company had the following activ

Question

For the year ended December 31,2007, The Granite Company had the following activity relative to its income tax calculations: (i) it made a charitable contribution of $26,000, of which only $10,000 was permitted as a taxable deduction, and (ii) it estimated warranty expense at $14,000, but actually spent only $6,000 for repairs and replacements of its products. In 2008, Granite's management calculated that all but $4,000 of the charitable contribution carryover could be deducted. In addition, warranty expense for GAAP purposes was $4,000, but the company spent $10,000 for repairs and replacements. In 2009, Granite was permitted to take the remainder of the charitable-contribution carryover; the company estimated warranty expense at $12,000 but spent $20,000 for repairs and replacements. It also had cost recovery for income tax purposes in an amount of $16,000 greater than book depreciation. The U.S. government has placed an embargo on doing business with the country of Grand Wachovia. In 2009, Granite realized that an expense of $10,000 for an import duty paid for products purchased from Grand Wachovia would not be an acceptable tax deduction. Granite's earnings before taxes were $100,000 in each of the years ended December 31,2007 through 2009. Prepare the following: a schedule for the calculation of taxable income for 2009.

Explanation / Answer

Answer : Taxable Income schedule for 2009

Particulars Amount ($) Amount ($) Gross income in 2009 before tax 100000 Less Charitable contribution made in 2007 (26000-10000-4000) 12000 Warranty expenses actual incurred 20000 32000 Add Import duty (which is not allowed as deduction) 10000 Cost recovery 16000 26000 Taxable income 94000

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