The 5000 written off is the same for both book and taxable income The temporary

The 5000 written off is the same for both book and

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D. The $5,000 written off is the same for both book and taxable income. The temporarydifference in bad debt expenses between the allowance method and the direct write-off methodis $10,000.© 2018 Gleim Publications Inc.Chapter 16 Class Questions 3
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[6]The correct answer is C.A. The excess depreciation on the tax return and the rent income reportable on the tax return thatis greater than rent income per the financial statements also require adjustments to book incometo calculate taxable income.B. Taxable income is not equal to book income.C. To reconcile income per books with income per tax, the following adjustments are made tonet income (loss) per books:Net income (loss) per books+Federal income tax+Excess of capital losses over capital gains+Income subject to tax not recorded on books+Expenses recorded on books not deducted on the tax return[including contributions in excess of 10% taxable income limitation,book depreciation expense in excess of allowable taxdepreciation, disallowed travel and entertainment costs (50% ofmeals and entertainment expenses are nondeductible), lifeinsurance premiums on key personnel when the corporation is thebeneficiary, political contributions, and interest expense to carrytax-free interest instruments (e.g., municipal bonds)]Income recorded on books not subject to tax (including prepaid rentor interest previously received and recorded for tax purposes butnot earned until the current year, life insurance proceeds receivedon the death of key personnel, and tax-exempt interest)Deductions on this return not charged against book income (e.g.,depreciation)=Taxable incomeTherefore, Azure’s taxable income for the current year is $544,000 [$543,000 book income –$20,000 depreciation + $36,000 rental income + $10,000 fine – $25,000 tax-exempt income(e.g., municipal bond)].D. Interest earned on municipal bonds would have been reported in book income as investmentrevenue but should be excluded for tax purposes; therefore, this amount should be deductedfrom book income to arrive at taxable income. Additionally, the fine for pollution is not permittedas a deduction for tax purposes. Thus, this expense must be added back to arrive at taxableincome. © 2018 Gleim Publications Inc.Chapter 16 Class Questions 4
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