Question

Oakland Corporation reported a net operating loss of $500,000 in year 1. Not included in the year 1 taxable income computation was a disallowed entertainment expense of $20,000, tax exempt income of $10,000, and deferred gain on an installment sale of $250,000. The corporation's current earnings and profits for year 1 would be:

a. $(260,000).
b. $(720,000).
c. $(500,000).
d. $(510,000).

Answer 1

To calculate the corporation's current earnings and profits for year 1, add back disallowed expenses and subtract deferred gains to the net operating loss.

Step-by-step explanation:

To calculate the corporation's current earnings and profits for year 1, we need to adjust the net operating loss by adding back the disallowed entertainment expense and the tax-exempt income, and subtracting the deferred gain on the installment sale.

Net operating loss = -$500,000

Disallowance of entertainment expense = +$20,000

Tax-exempt income = +$10,000

Deferred gain on installment sale = -$250,000

Current earnings and profits for year 1 = -$500,000 + $20,000 - $10,000 - $250,000 = $(740,000)