Practice 16.docx - 1. Required information The following...

1. Required information
[The following information applies to the questions displayed below.]
XYZ is a calendar-year corporation that began business on January 1, 2018. For the year, it reported the following information in its current-year
audited income statement. Notes with important tax information are provided below. Use Exhibit 16-6.
XYZ corp.
Book
Income
Income statement
For current year
Revenue from sales $ 40,000,000
Cost of Goods Sold (27,000,000)
Gross profit $ 13,000,000
Other income:
Income from investment in corporate stock 300,000
1
Interest income 20,000 2
Capital gains (losses) (4,000)
Gain or loss from disposition of fixed
assets
3,000
3
Miscellaneous income 50,000
Gross Income $ 13,369,000
Expenses:
Compensation (7,500,000)
4
Stock option compensation (200,000)
5
Advertising (1,350,000)
Repairs and Maintenance (75,000)
Rent (22,000)
Bad Debt expense (41,000) 6
Depreciation (1,400,000)
7
Warranty expenses (70,000)
8
Charitable donations (500,000) 9
Meals (18,000)
Goodwill impairment (30,000) 10
Organizational expenditures (44,000) 11
Other expenses (140,000)
12
Total expenses $(11,390,000)
Income before taxes $ 1,979,000
Provision for income taxes (720,000) 13

Net Income after taxes $ 1,259,000
14
Notes:
1. XYZ owns 30 percent of the outstanding Hobble Corp. (HC) stock. Hobble Corp. reported $1,000,000 of income for the year. XYZ accounted
for its investment in HC under the equity method and it recorded its pro rata share of HC's earnings for the year. HC also distributed a
$200,000 dividend to XYZ.
2. Of the $20,000 interest income, $5,000 was from a City of Seattle bond issued in 2018 that was used to fund public activities, $7,000 was
from a Tacoma City bond issued in 2017 (a private activity bond), $6,000 was from a fully taxable corporate bond, and the remaining $2,000
was from a money market account.
3. This gain is from equipment that XYZ purchased in February and sold in December (i.e., it does not qualify as §1231 gain).
4. This includes total officer compensation of $2,500,000 (no one officer received more than $1,000,000 compensation).