[6] Corporation W, which uses the accrual method of accounting, had earnings and

Question

[6] Corporation W, which uses the accrual method of accounting, had earnings and profits of $95,000 on December 31, Year 1. Based on the following information, compute earnings and profits as of December 31, Year 2:

            Taxable income per return                             $185,000

            Contributions in excess of 10% limitation            1,500

            Interest paid for tax-exempt bonds                      1,000

            Tax-exempt interest received                               3,000

            Federal income taxes                                         55,400

            MACRS depreciation from

                  Property acquisitions on return in excess

                  of straight-line alternative depreciation

                  system                                                             1,500

A. $226,600

B. $220,600

C. $282,000

D. $228,600

Explanation / Answer

Contributions in excess of 10% limitation would have not been deducted from Taxable Income since it is disallowed. Thus, we have to deduct it now from the income to get financial profit.

Computation earnings and profits as of December 31, Year 2:

Taxable income per return                             $185,000

Less: Contributions in excess of 10% limitation 1,500

Interest paid for tax-exempt bonds 1,000

Federal income taxes 55,400

Add: Tax-exempt interest received 3,000

  MACRS depreciation 1500

Profits of Year 1 95000

Earnings and profits as of December 31, Year 2 = 226600

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