Question

Timpanogos Incorporated, an accrual-method, calendar-year corporation, reported financial statement income after taxes of $1,477,500 for the year 2022. Timpanogos provides the following information regarding its 2022 activities:

Life insurance proceeds (CEO's death): $220,000
Revenue from sales (for both book and tax purposes): $2,200,000
Premiums paid on key-person life insurance policies (no cash surrender value): $23,000
Charitable contributions: $198,000
Cost of goods sold (for both book and tax purposes): $330,000
Interest income on tax-exempt bonds: $44,000
Interest paid on a loan obtained to purchase tax-exempt bonds: $49,500
Rental income payments received and earned in 2022: $17,000
Rental income payments received in 2021 but earned in 2022: $11,000
Rental income payments received in 2022 but not earned by year-end: $33,000
Tax depreciation: $60,000
Book depreciation: $27,000
Net capital loss: $46,000
Federal income tax expense for books in 2022: $341,000
Required:

Reconcile Timpanogos Incorporated's book income to taxable income. Start with book income and identify all adjustments necessary to arrive at taxable income. Clearly indicate each book-tax difference as either permanent (P) or temporary (T). Complete Schedule M-1 for Timpanogos. Also, compute Timpanogos Incorporated's tax liability.

Answer 1

To reconcile Timpanogos Incorporated's book income to taxable income, one must adjust the financial statement income for permanent and temporary items that differ between book and tax purposes. After these adjustments, applying the appropriate corporate tax rates to the adjusted taxable income determines the company's tax liability.

Step-by-step explanation:

Reconciling Timpanogos Incorporated's book income to taxable income involves adjusting the financial statement income for items with book-tax differences. Book income starts with the reported financial statement income after taxes for 2022, which is $1,477,500. The following adjustments are made to this amount:

• Life insurance proceeds (CEO's death): $220,000 (Permanent)
• Premiums on key-person life insurance: $(23,000) (Permanent)
• Charitable contributions: $(198,000) (Temporary)
• Tax-exempt bond interest income: $(44,000) (Permanent)
• Interest paid on loan for tax-exempt bonds: $49,500 (Temporary)
• Rental income earned in 2022 (included in 2021): $11,000 (Temporary)
• Rental income unearned in 2022 (received in 2022): $(33,000) (Temporary)
• Excess of tax over book depreciation: $(60,000 - $27,000) (Temporary)
• Net capital loss: $(46,000) (Temporary)

Net taxable income for corporate tax is calculated by adding together these adjustments to the financial statement income. The specific tax owed would be based on the currently applicable corporate tax rates and could follow a tax schedule such as the example provided, although corporate rates and schedules have different percentages and ranges than individual taxes.

To calculate the tax liability, one would apply the appropriate corporate tax rates to the adjusted taxable income. If the rate were a flat percentage, this would be a straightforward multiplication. However, if a graduated rate system like the one in the example provided is used, the calculation would involve adding a fixed amount to a percentage of the income over a certain threshold.