C12-Chp-02-3A-Corp-Tax-Return-Assignment-Illustration-2012

C12-Chp-02-3A-Corp-Tax-Return-Assignment-Illustration-2012...

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Unformatted text preview: Notes e84aed99ae2d3fd9794a91c33b968f297c4f7fbd.xls Page 1 of 8 Background Information Charlotte Corp. was started on 1-1-2011 with an investment of $400,000 by the current owner. It has completed its first year of operations. It has not paid dividends. The company purchased some investments and some fixed assets. The company has accounts payable at the end of its first year. You are given a complete trial balance at the end of the first year (GAAP, not tax). That trial balance shows balances for assets, liabilities (accounts payable) owner equity (capital stock), revenues and expenses. You will note that since this is the end of the first year and the books have not been closed, there is no balance in retained earnings. The closing process will cause retained earnings to have a balance. Notes 1 The revenues and expenses (next tab) are based on GAAP, not tax law. Federal income tax expense is an expense on the GAAP income statement, but it is not a deductible expense on the federal corporate income tax. (We compute Federal income tax on the tax return but we do not claim a deduction for it.) [In contrast, state income tax is deductible.] 2 When computing federal corporate taxable income, it will be necessary to add back (un-deduct) the $40,000 payment for federal income tax [that is shown among the expenses that are subtracted from revenue to get book income of $76,000]. 3 The company uses the allowance method for bad debts. It set up an allowance account and recorded bad debts expense for $7,000, even though there has been no write-off of bad debts in 2011. The direct write-off method must be used for tax purposes. 4 Charlotte Corporation shows a charitable contribution of $40,000 among its book expenses. It is necessary to add that back to get an adjusted taxable income figure that is before deducting charitable contributions. Deduction for Charitable contributions limited to 10% of T.I. [T.I. before deducting charitable contribution]. After computing the deductible amount for charity, you enter that deduction on the tax return. 5 Charlotte Corporation has invested in tax-exempt North Carolina bonds and earned tax-free income of $14,000. That is income for GAAP purposes, but not for corporate taxable income computations. It needs to be removed (un-included). 6 Charlotte Corporation had capital losses of $15,000 (or capital losses exceeding capital gains by $15,000 the problem does not indicate how many capital assets were sold, etc.) A corporation can only deduct capital losses against capital gains. Excess capital losses are carried to other years. 7 Charlotte Corporation spent $18,000 on entertainment expense, but that is only deductible to the extent of 50% on the corporate tax return....
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C12-Chp-02-3A-Corp-Tax-Return-Assignment-Illustration-2012...

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