Question

Au Sable Corporation reported taxable income of $760,000 in year 2 and paid federal income taxes of $176,500. Not included in the computation was a disallowed penalty of $42,000, and life insurance proceeds of $185,000. Included in the computation of taxable income is a deduction for the bargain element of exercised nonqualified stock options of $67,000. The corporation's current earnings and profits for year 2 would be:

Answer 1

$726,500

Explanation:

The computation of current earnings and profits for year 2 is shown below:-

current earnings and profits for year 2 = Profit as per Income Tax - Penalty disallowed + Life insurance proceed - Tax Expenses

= $760,000 - $42,000 + $185,000 - $176,500

= $945,000 - $42,000 - $176,500

= $726,500

Therefore we have applied the above formula to reach out the current earnings and profits for year 2.