Book to Tax Adjustment

"ComLinks

Income Statement

for Current Year" Book Income Note Book$-$tax Adjustemnts$($Dr$.)$ Cr$.$ Taxable Income

Sales Revenue $$40,000,00040,000,000$

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

Gross profit $$13,000,00013,000,000$

Other Income:

Income from investment in corporate stock $300,000$ #$1(100,000)$ T $200,000$

interest income $20,000$ #$2(12,000)$ P $8,000$

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

Gain or loss from disposition of fixed assets $3,000$ #$33,000$

Miscellaneous income $50,00050,000$

Gross Income $$13,369,00013,261,000$

Expenses

Compensation $(7,500,000)$ #$4(7,500,000)$

Stock option compensation $(200,000)$ #$5200,000-$

Advertising $(1,350,000)(1,350,000)$

Repairs and maintenance $(75,000)(75,000)$

Rent $(22,000)(22,000)$

Bad debt expense $(41,000)$ #$614,000$ T $(27,000)$

Depreciation $(1,400,000)$ #$7(500,000)$ T $(1,900,000)$

Warranty expenses $(70,000)$ #$870,000$ T $-$

Meals $($All from restaurants$)(18,000)-(18,000)$

Goodwill impairment $(30,000)$ #$1020,000$ T $(10,000)$

Organizational expenditures $(44,000)$ #$1136,400$ T $(7,600)$

Other expenses $(140,000)$ #$12(140,000)$

Provision for income taxes$/($Federal Income tax Expense$)(400,000)$ #$13400,000$ P $-$

Total Expenses before charitable contribution, NOL, and DRD $(11,290,000)(11,049,600)$

Income before charitable contributin and DRD $2,211,400$

Charitable contribution $(500,000)$ #$9278,860$ T $(221,140)$

Taxble income before DRD $1,990,260$

Dividends received deduction $($DRD$)(130,000)$ P $(130,000)$

Book$/$Taxable income $1,579,000281,2601,860,260$

ComLinks is a calendar$-$year corporation that began business on January $1,2022.$ For the year, it reported the financial information in its current year audited income statement $($See the attached Excel file$).$ Notes within important tax information are provided below:

$1.$ ComLinks owns $30$ percent of the outstanding Hobble Corp. $($HC$)$ stock. HC reported $$1,000,000$ of income for the year. ComLinks accounted for its investment in HC under the equity method, and it reported its pro rata share of HC$$s earnings for the year. HC also distributed a $$200,000$ dividend to ComLinks. For tax purposes, HC reports the actual dividend received as income, not the pro rata share of HC$$s earnings. $($Tip: I completed this one in Excel worksheet, so that everyone can see my expected presentation$)$

$2.$ Of the $$20,000$ interest income, $$5,000$ was from a City of Seattle bond, $$7,000$ was from a Tacoma City bond, $$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 ComLinks purchased in February and sold in December $($i$.$e$.,$ it does not qualify as $1231$ gain$).$

$4.$ This includes total office 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 was expensed during the year $($recipients are officers$).($Tip: This question is answered in Excel worksheet as we did not teach it in chapter $16).$

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

$7.$ Tax depreciation was $$1,900,000$

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

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

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

$11.$ ComLinks expensed all of its organizational expenditures for book purposes. ComLinks 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 ComLinks is not subject to state income tax.

Estimated Tax Information:

ComLinks made four equal estimated tax payments totaling $$360,000($$$90,000$ per quarter$).$ For purposes of estimated tax liabilities, assume ComLinks was in existence in $2021$ and that in $2021$ it reported a tax liability of $$500,000.$ During $2022,$ ComLinks determined its taxable income at the end of each of the four quarters as follows:

Quarter$-$End Cumulative Taxable Income $($Loss$)$

First $$400,000$

Second

Third $$400,000$

$1,100,000$

Forth $1,400,000$

Finally, assume that ComLinks is not a large corporation for purposes of estimated tax calculation.

Requirements:

Based upon the provided information and notes, please completed the following in group:

a$.$ Reconcile book income to taxable income and identify each book$-$tax difference as temporary or permanent in the Excel file. $($Tip: see textbook chapter $16$ Exhibit $16-8$ for Book$-$Tax Reconciliation