Question

Falcon Corporation ended its first year of operations with taxable income of $250,000. At the time of Falcon's formation, it incurred $50,000 of organizational expenses. In calculating its taxable income for the year, Falcon claimed an $8,000 deduction for the organizational expenses. What is Falcon's current E & P?a. $258,000b. $208,000c. $200,000d. $250,000e. None of these choices are correct.

Answer 1

A. 258,000

Step-by-step explanation:

• Falcon Corporaton's taxable income for its first year of operation= $250,000
• Formation Expenses fo Falcon Corporaton = $50,000
• Deduction claimed by Falcon as Organisational expenses= $8,000
• Falcon's Current Earnings and Profit therefore is the addition of the Current taxable income and the deduction claimed as organisational expense
• = $250,000 + $8,000= $258,000

Note: The reason why Falcon was able to deduct the $8,000 in the initial calculation of its taxable income for the year is that the Internal Revenue Service allows a Start-up Corporatio to deduct $5,000 in business startup costs and $5,000 in organizational costs only if the formation expenses or start-up cost is $50,000 or less. This exemption is removed once the expense is over $50,000.

Since, Falcon only incurred $50,000 as organisational expense during formation, the $8,000 is still within the limits of $10,000 allowed by the IRS.

However, The calculation of a firm's Earning and Profit represents a corporation's economic ability to pay dividends to its shareholders and it helps determine whether this dividend is taxable or not.

In calculating the E and P therefore, the claimed deduction from organisational expense must be added back to the taxable income. That is why Falcon's current Earnings and Profit is $258,000

Answer 2

Answer: a. $258,000

Step-by-step explanation:

The organization expense ($8,000) is a capital expense and therefore is an enduring benefit for the organization. Capital expenditure is added back while calculating the E & P. Moreover, any organizational cost are treated as capital expenditure and these costs are written off in the E & P only when the organization is not anymore a going concern.

Going Concern is an assumption whereby an organization will continue to operate indefinitely.