Question

Zurich Company reports pretax financial income of $70,000 for 2025 . The following items cause taxable income to be different than pretax financial income.

1. Depreciation on the tax return is greater than depreciation on the income statement by $16,000.
2. Rent collected on the tax return is greater than rent recognized on the income statement by $22,000.
3. Fines for pollution appear as an expense of $11,000 on the income statement.

Answer 1

The student's question relates to the adjustments needed to calculate Zurich Company's taxable income, considering depreciation, rent, and fines. The adjustments lead to a taxable income of $76,000 for 2025, demonstrating the differences between pretax financial and tax reporting.

Step-by-step explanation:

The student's question pertains to the calculation of taxable income for a corporation, accounting for the differences between pretax financial income and taxable income due to specific items that are treated differently for accounting and tax purposes. When considering Zurich Company's scenario, with pretax financial income of $70,000 for 2025, the steps to calculate its taxable income would be:

• Deduct the additional tax depreciation from pretax financial income ($70,000 - $16,000).
• Add the excess rent collected per the tax return compared to the income statement ($54,000 + $22,000).
• Fines for pollution are non-deductible for tax purposes, so this does not change the taxable income ($76,000).

Thus, the taxable income for Zurich Company would be $76,000, after accounting for the differing treatments of depreciation, rent, and fines. The treatment of these items may lead to temporary or permanent differences between accounting income and taxable income, which are reconciled when preparing corporate tax returns.