Question

Oakland corporation reported a net operating loss of $500,000 in 20x3 and decided to carry forward to 20x4. Not included in the computation was a disallowed meals and entertainment expense of $20,000 tax exempt income of $10,000 and deferred gain on installment sale of $250,000. The corporations current earning and profit for 20x3 would be?

A. ($500,000)
B. ($720,000)
C. ($510,000)
D. ($260,000)

Answer 1

The corporation's current earnings and profit for 20x3 would be -$480,000.

Step-by-step explanation:

To determine the corporation's current earnings and profit for 20x3, we need to consider the net operating loss and the disallowed expenses and income. The net operating loss of $500,000 in 20x3 indicates that the corporation's expenses exceeded its revenues for that year. However, the disallowed meals and entertainment expense of $20,000 should be added back to the net operating loss to calculate the current earnings and profit.

Therefore, the current earnings and profit for 20x3 can be calculated as follows:
Net operating loss: -$500,000
Add back disallowed expense: +$20,000
Current earnings and profit: -$500,000 + $20,000 = -$480,000