Question

7

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1
Loong Corporation, a calendar year accrual besis corporation, reported $1 million of net income after tax on its financial statements
prepared in accordance with GAAP. The corporation's books and records reveal the following information
Luong's federal income tax expense per books was $200,000
- Luong's book income included $10,000 of dividends received from a domestic corporation in which Luong owns a 25 percent stock
interest and $4,000 of dividends from a domestic corporation in which Luong owns a 5 percent stock interest
- Luong recognized $10,000 of capital losses this year and no capital gains
- Luong recorded $8,000 of book expense for meals not provided by a restaurant and $10,000 of book expense for entertainment
- Luong's depreciation expense for book purposes totaled $400,000 MACRS depreciation was $475.000
Required:
& Compute Luong's federal taxable income and regular tax liability
& Prepare a Schedule M-1, page 6, Form 120, reconciling Luong's book and taxable income.
Required A
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Answer is complete but not entirely correct.
Compute Loong's federal taxable income and regular tax liability
Note: Enter your answers in whole dollars not in millions.
Amount

Answer 1

There is a typo in the company name in the question (Loong instead of Luong), but I will assume that it is just a typo and proceed with the question.

To compute Luong's federal taxable income, we need to start with the financial statement net income of $1 million and make adjustments for items that are not deductible for tax purposes and for items that are taxable but not included in book income. From the information provided, we have:

- Federal income tax expense per books: $200,000 (not deductible for tax purposes)
- Dividends received deduction: $10,000 x 0.25 = $2,500 (deductible for tax purposes)
- Capital losses: $10,000 (deductible for tax purposes)
- Meal and entertainment expenses: $8,000 + $10,000 = $18,000 (50% deductible for tax purposes)
- Depreciation: $475,000 (MACRS) - $400,000 (book) = $75,000 (taxable but not included in book income)

Therefore, Luong's federal taxable income is:

$1,000,000 - $200,000 - $2,500 - $10,000 - $9,000 + $75,000 = $853,500

To compute Luong's regular tax liability, we need to use the corporate tax rate schedule. For taxable income between $500,000 and $10,000,000, the tax rate is 34%. Therefore, Luong's regular tax liability is:

$853,500 x 34% = $290,790

To prepare a Schedule M-1, we need to reconcile Luong's book income to taxable income. The Schedule M-1 has two sections: reconciling items that increase book income but do not affect taxable income, and reconciling items that decrease book income but do not affect taxable income. From the information provided, we have:

Reconciling items that increase book income:

- Depreciation: $400,000
- Meals and entertainment: $18,000

Reconciling items that decrease book income:

- Federal income tax expense: $200,000
- Dividends received: $10,000
- Capital losses: $10,000

Therefore, Luong's Schedule M-1 is:

Increase in book income:

Depreciation: $400,000

Meals and entertainment: $18,000

Total increase: $418,000

Decrease in book income:

Federal income tax expense: $200,000

Dividends received: $10,000

Capital losses: $10,000

Total decrease: $220,000

Net increase in book income: $418,000 - $220,000 = $198,000

Therefore, Luong's taxable income per Schedule M-1 is:

Book income: $1,000,000

Net increase: $198,000

Taxable income: $1,198,000

This completes the answer to the question.