Question

Corporation W, which uses the accrual method of accounting, had earnings and profits of $95,000 on December 31, Year 1. Based on the following information, compute earnings and profits as of December 31, Year 2:

Taxable income per return $185,000
Contributions in excess of 10% limitation 1,500
Interest paid for tax-exempt bonds 1,000
Tax-exempt interest received 3,000
Federal income taxes 55,400
MACRS depreciation in excess of straight-line alternative depreciation system 1,500

a. $226,600
b. 220,600
c. $282,000
d. $228,600

Answer 1

a. $226,600

Step-by-step explanation:

Profit = $ (95000+185000-1500

- 1,000 + 3,000 - 55,400 + 1,500 )= $226000

items added back to profit are allowed deductions while items deducted are disallowed deductions

Depreciation was added back to profit because method used was in excess of straight line method and so does not reflect true depreciation