C12-Chp-05-3P-Compute-Earnings-and-Profits

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					                                                                                              5-23
Tab:Problem                   File:f8f8c8ad-1ff1-4529-b4cd-059e55db29cc.xls


    Compute Earnings & Profits
      Davis Corporation, an accrual method taxpayer,
      Davis had accumulated E & P of $100,000 as of December 31, 2004.
      For the 2005 tax year, Davis' books and records reflect the following:
       Sales                                                                   $700,000
         Cost of sales                                            $400,000
         Municipal bond interest                                                   2,000
         Compensation                                              100,000
         Meals and entertainment (Gross)                            20,000
         Payroll taxes, and Miscellaneous Expense                  140,000
       Subtotal                                                    660,000      702,000
       Net Income before taxes                                      42,000
       Total                                                      $702,000     $702,000
      Davis does not have any carryover of losses, deductions or credits to this year.
      The company does not qualify for any credits in the current year.
      You may ignore the impact of state income taxes.
      What is the amount of accumulated E & P as of December 31, 2005?
     a. $134,500 b. $187,000 c. $250,000        d. $313,000 e. None of these
     First Compute Taxable Income & Income Tax                   Debit       Credits
       Sales                                                                             $700,000
       Cost of sales                                                          $400,000
       Municipal bond interest                                                              2,000
       Compensation                                                            100,000
       Meals and entertainment (Gross)                                          20,000
       Payroll taxes, & Misc. Expense                                          140,000
       Subtotal                                                                660,000    702,000
       Net Income (GAAP) before taxes
        Add: one half of entertainment
        Deduct: municipal bond interest
      Taxable income
      Income Tax
      Compute Earnings & Profits (Similar to Retained Earnings)
      Taxable Income
       Tax-exempt income                                                        Add
       Federal income taxes                                                   Subtract
       Nondeductible entertainment                                            Subtract
      Equals: Current Earnings and Profits
       Add: Accumulated E&P at first of year
      Total
       Less: Dividends paid
      Earnings and Profits at End of Year
      Note: E & P is reduced by nondeductible expenses that reduce
       dividend paying ability - such as non-deductible entertainment expense.
                                                                                                 5-23
Tab:Solution                   File:f8f8c8ad-1ff1-4529-b4cd-059e55db29cc.xls


     Compute Earnings & Profits
       Davis Corporation, an accrual method taxpayer,
       Davis had accumulated E & P of $100,000 as of December 31, 2004.
       For the 2005 tax year, Davis' books and records reflect the following:
        Sales                                                                  $700,000
          Cost of sales                                            $400,000
          Municipal bond interest                                                  2,000
          Compensation                                              100,000
          Meals and entertainment (Gross)                            20,000
          Payroll taxes, and Miscellaneous Expense                  140,000
        Subtotal                                                    660,000     702,000
        Net Income before taxes                                      42,000
        Total                                                      $702,000    $702,000
       Davis does not have any carryover of losses, deductions or credits to this year.
       The company does not qualify for any credits in the current year.
       You may ignore the impact of state income taxes.
       What is the amount of accumulated E & P as of December 31, 2005?
      a. $134,500 b. $187,000 c. $250,000        d. $313,000 e. None of these
      First Compute Taxable Income & Income Tax                   Debit       Credits
        Sales                                                                              $700,000
        Cost of sales                                                          $400,000
        Municipal bond interest                                                               2,000
        Compensation                                                            100,000
        Meals and entertainment (Gross)                                          20,000
        Payroll taxes, & Misc. Expense                                          140,000
        Subtotal                                                                660,000     702,000
        Net Income (GAAP) before taxes                                           42,000
         Add: one half of entertainment                                          10,000
         Deduct: municipal bond interest                                         (2,000)
       Taxable income                                                            50,000
       Income Tax                                                                 7,500
       Compute Earnings & Profits (Similar to Retained Earnings)
       Taxable Income                                                                        50,000
        Tax-exempt income                                                        Add          2,000
        Federal income taxes                                                   Subtract      (7,500)
        Nondeductible entertainment                                            Subtract     (10,000)
       Equals: Current Earnings and Profits                                                  34,500
        Add: Accumulated E&P at first of year                                               100,000
       Total                                                                                134,500
        Less: Dividends paid
       Earnings and Profits at End of Year                                                  134,500
       Note: E & P is reduced by nondeductible expenses that reduce
        dividend paying ability - such as non-deductible entertainment expense.
Tab: Worksheet                    File:f8f8c8ad-1ff1-4529-b4cd-059e55db29cc.xls           Page 3 of 3

  Computation of Earnings and Profits
  Taxable income
  Plus: Income excluded from taxable income but included in E&P
    Tax-exempt interest income
    Life insurance proceeds where the corporation is the beneficiary
    Recoveries of bad debts and other deductions from which the corporation
    received no tax benefit
    Federal income tax refunds from prior years
  Plus: Deferred Income that is included in E&P in the current year
    Deferred gain on installment sales is included in E&P in year of sale
  Plus or minus: Income & deduction items that ARE recomputed when
  computing E&P
    Income on long-term contracts must be based on percentage of completion
    method rather than completed contract method
    Depreciation on personal and real property must be based on:
         The straight-line method for property other than MACRS or ACRS property
         Straight-line ACRS calculation with extended recovery period for ACRS property
         The alternative depreciation system for MACRS property
   Excess of percentage depletion claimed over cost depletion
  Plus: Deductions that reduce taxable income but do not affect E&P
   Dividends-received deduction
   Carryovers (NOL, charity, and capital loss) used in current year
  Minus: Non-Deductible Expenses and Losses that reduce E&P
   Federal income taxes
   Life insurance premiums where the corporation is the beneficiary
   Excess capital losses that are not deductible in current year
   Excess charitable contributions that are not deductible in current year
   Expenses related to production of tax-exempt income
   Nondeductible losses on sales to related parties
   Nondeductible penalties and fines
   Nondeductible political contributions and lobbying expenses
  Equals: Current Earnings and Profits
   Add: Accumulated Earnings & Profits at end of Prior Year
   Subtotal
   Less: Dividends paid in Current Year
  Earning and Profits at end of Current Year

				
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