$1.$XYZ is a calendar$-$year corporation that began business on January $1,2021.$ For $2021,$ it reported the following information in its current year audited income statement. Notes with important tax information are provided below.

Required:

a$.$ Reconcile book income to taxable income and identify each book$-$tax difference as temporary or permanent.

b$.$ Complete XYZ$$s Schedule M$-1.$

c$.$ Complete XYZ$$s Form $1120,$ page $1$

XYZ corp. Book to Tax

Income statement Book Adjustments Taxable

For current year Income $($Dr$.)$ Cr$.$ Income

Revenue from sales $$40,000,000$

Cost of Goods Sold $(27,000,000)$

Gross profit $$13,000,000$

Other income:

Income from investment in corporate stock $300,0001$

Interest income $20,0002$

Capital gains $($losses$)(4,000)$

Gain or loss from disposition of fixed assets $3,0003$

Miscellaneous income $50,000$

Gross Income $$13,369,000$

Expenses:

Compensation $(7,500,000)4$

Stock option compensation $(200,000)5$

Advertising $(1,350,000)$

Repairs and Maintenance $(75,000)$

Rent $(22,000)$

Bad Debt expense $(41,000)6$

Depreciation $(1,400,000)7$

Warranty expenses $(70,000)8$

Charitable donations $(500,000)9$

Meals and entertainment $(18,000)$

Goodwill impairment $(30,000)10$

Organizational expenditures $(44,000)11$

Other expenses $(140,000)12$

Total expenses $($$$11,390,000)$

Income before taxes $$1,979,000$

Provision for income taxes $(720,000)13$

Net Income after taxes $$1,259,00014$

$$

Notes:

$1.$ XYZ owns $30\%$ of the outstanding Hobble Corp. $($HC$)$ stock. Hobble Corp. reported $$1,000,000$ of income for the year. XYZ accounted for its investment in HC under the equity method and it recorded its pro rata share of HC$$s earnings for the year. HC also distributed a $$200,000$ dividend to XYZ$.$

$2.$ Of the $$20,000$ interest income, $$5,000$ was from a City of Seattle bond $($issued in $2007)$ that was used to fund public activities, $$7,000$ was from a Tacoma City bond $($issued in $2008)$ used to fund private activities, $$6,000$ was from a fully taxable corporate bond, and the remaining $$2,000$ was from a money market account.

$3.$ This gain is from equipment that XYZ purchased in February and sold in December $($that is$,$ it does not qualify as $1231$ gain$).$

$4.$ This includes total officer compensation of $$2,500,000($no one officer received more than $$1,000,000$ compensation$).$

$5.$ This amount is the portion of incentive stock option compensation that vested during the year $($recipients are officers$).$

$6.$ XYZ actually wrote off $$27,000$ of its accounts receivable as uncollectible.

$7.$ Regular tax depreciation was $$1,900,000$ and AMT $($and ACE$)$ depreciation was $$1,700,000.$

$8.$ In the current year, XYZ did not make any actual payments on warranties it provided to customers.

$9.$ XYZ made $$500,000$ of cash contributions to qualified charities during the year.

$10.$ On July $1$ of this year XYZ acquired the assets of another business. In the process it acquired $$300,000$ of goodwill. At the end of the year, XYZ wrote off $$30,000$ of the goodwill as impaired.

$11.$ XYZ expensed all of its organizational expenditures for book purposes. It expensed the maximum amount of organizational expenditures allowed for tax purposes.

$12.$ The other expenses do not contain any items with book$-$tax differences.

$13.$ This is an estimated tax provision $($federal tax expense$)$ for the year. Assume that XYZ is not subject to state income taxes.

$$

Schedule M$-1$

$1$ Net income per books

$2$ Federal income tax provision

$3$ Excess of capital losses over capital gains

$4$ Income subject to tax not recorded on books this year $($itemize$)$

$5$ Expenses recorded on books this year not deducted on this return

a$.$ Depreciation

b$.$ Contributions carryover

c$.$ Travel and entertainment

Stock option compensation $($incentive stock options$)$

Bad debt expense

Warranty expense

Goodwill impairment

Organizational expenditures

$6$ Add lines $1$ through $5$

$7$ Income recorded on books this year not included on this return

a$.$ Tax exempt interest

Income from investment in corporate stock

$8$ Deductions on this return not charged against book income this year

a$.$ Depreciation

b$.$ Contributions carryover

Domestic production activities deduction

$9$ Add lines $7$ and $8$

$10$ Income$$ line $6$ less line $9$

Note that line $10$ does not reconcile to XYZ$$s taxable income. It reconciles to taxable income before the dividends received deduction