Question

The accounting records of Crane Inc. show the following data for 2025 (its first year of operations).

1. Life insurance expense on officers was $9,900.
2. Equipment was acquired in early January for $288,000. Straight-line depreciation over a 5-year life is used, with no salvage value. For tax purposes, Crane used a 30% rate to calculate depreciation.
3. Interest revenue on State of New York bonds totaled $4,300.
4. Product warranties were estimated to be $51,100 in 2025. Actual repair and labor costs related to the warranties in 2025 were $9,300. The remainder is estimated to be paid evenly in 2026 and 2027.
5. Gross profit on an accrual basis was $110,000. For tax purposes, $73,200 was recorded on the installment-sales method.
6. Fines incurred for pollution violations were $4,500.
7. Pretax financial income was $713,600. The tax rate is 30%.

Answer 1

To calculate the accounting profit for Crane Inc., one must adjust the pretax financial income by considering book-tax differences, non-taxable revenues, non-deductible expenses, and different reporting methods. The accounting profit is the remainder after making these adjustments.

Step-by-step explanation:

The student's question pertains to a variety of factors that affect the determination of accounting profit for Crane Inc. To calculate the accounting profit, we should first deduct all explicit costs from the total revenue. Here's a breakdown of the calculation:

Begin with pretax financial income: $713,600.

Adjust for the differences between book and tax deductions:

Add non-taxable revenue (interest on state bonds): $4,300.

Deduct non-deductible expenses (fines for pollution): $4,500.

Finally, adjust for the difference between accrual-based gross profit and installment sales method gross profit recorded for tax purposes: $110,000 - $73,200 = $36,800.

For equipment depreciation, the accounting expense is $288,000/5 years = $57,600. For tax purposes, it is 30% of $288,000 = $86,400. This creates a temporary difference of $28,800 more in tax depreciation.

Product warranties estimated were $51,100, and actual costs were $9,300, resulting in an additional expense of $41,800 that will reverse in future periods when the costs are incurred.

In summary, by adjusting the pretax financial income with these components, we arrive at the accounting profit.