Comprehensive Problem 16-65 (LO 16-1, LO 16-2, LO 16-3)

a. Compute XYZ's taxable income

b. Compute XYZ's income tax liability

c. Complete XYZ's Schedule M-1

d. Complete XYZ's For, 1120, Page 1

e. Determine the quarters for which XYZ is subject to underpayment tax penalties

XYZ is a calendar-year corporation that began business on January 1, 2020. For the year, it reported the following information in its current-year audited income statement. Notes with important tax information are provided below. Use Exhibit 16-6. XYZ corp. Income statement For current year Revenue from sales Cost of Goods Sold Gross profit Book Income $ 40,000,000 (27,000,000) $ 13,000,000 Other income: Income from investment in corporate stock Interest income Capital gains (losses) Gain or loss from disposition of fixed assets Miscellaneous income Gross Income Expenses: Compensation Stock option compensation Advertising Repairs and Maintenance 300,0001 20,0002 (4,000) 3,0003 50,000 $ 13,369,000 4 Rent 6 Bad Debt expense Depreciation Warranty expenses Charitable donations Meals Goodwill impairment Organizational expenditures Other expenses Total expenses Income before taxes Provision for income taxes Net Income after taxes (7,500,000) (200,000) 5 (1,350,000) (75,000) (22,000) (41,600)6 (1,400,000)? 7 (70,000) 8 (500,000) (18,000) (30,000, 10 (44,000) 11 (140,000 12 $(11,390,000) $ 1,979,000 (400,000) 13 $ 1,579,000 1. XYZ owns 30 percent 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, $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 XYZ purchased in February and sold in December (i.e., 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 was expensed during the year (recipients are officers). 6.XYZ actually wrote off $27,000 of its accounts receivable as uncollectible. 7. Tax depreciation was $1,900,000. 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. XYZ 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. Estimated tax information: XYZ made four equal estimated tax payments totaling $360,000 ($90,000 per quarter). For purposes of estimated tax liabilities, assume XYZ was in existence in 2019 and that in 2019 it reported a tax liability of $500,000. During 2020, XYZ determined its taxable income at the end of each of the four quarters as follows: Quarter-end First Second Third Cumulative taxable income (loss) $ 400,000 $1,100,000 $ 1,400,000 Schedule M1 Schedule M1 Schedule M-1 Reconciliation of Income (Loss) per Books With Income per Return Note: The corporation may be required to file Schedule M-3. See instructions. 1 Net income (loss) per books 2 Federal income tax per books 3 Excess of capital losses over capital gains 4 Income subject to tax not recorded on books this year (itemize): Income recorded on books this year not included on this return (itemize): Tax-exempt interest 8 Deductions on this return not charged 5 Expenses recorded on books this year not deducted on this return (itemize): against book income this year (itemize): a Depreciation a Depreciation b Charitable contributions b Charitable contributions c Travel and entertainment c Other (itemize) Other itemize) 9 Add lines 7 and 8 6 Add lines 1 through 5 10 Income (page 1, line 28)-line 6 less line 9 THIS FORM IS A SIMULATION OF AN OFFICIAL U.S. TAX FORM. IT IS NOT THE OFFICIAL FORM ITSELF. DO NOT USE THIS FORM FOR TAX FILINGS OR FOR ANY PURPOSE OTHER THAN EDUCATIONAL. 2020 McGraw-Hill Education. D Total assets (see instructions) (4) Address change 0 1c 0 2 3 0 4 51 6 7 7 8 8 9 10 11 12 0 3 Personal service corp. (see instructions) City or town, state or province, country, and ZIP or foreign postal code 4 Schedule M-3 attached M- E Check if: (1) Initial return ( (2) Final return (3) Name change 1a Gross receipts or sales 1a b Returns and allowances b 1b Balance. Subtract line 1b from line 1a 2 Cost of goods sold (attach Form 1125-A) 3 Gross profit. Subtract line 2 from line 1c 4 Dividends and inclusions (Schedule C, line 23) Income 5 Interest 6 Gross rents 7 Gross royalties 8 Capital gain net income (attach Schedule D (Form 1120)) 9 Net gain or loss) from Form 4797, Part II, line 17 (attach Form 4797) 10 Other income (see instructions-attach statement) 11 Total income. Add lines 3 through 10 12 Compensation of officers (see instructions-attach Form 1125-E) 13 Salaries and wages (less employement credits) 14 Repairs and maintenance 15 Bad debts 16 Rents 17 Taxes and licenses 18 Interest (see instructions) Deductions 19 Charitable contributions (See 20 Depreciation from Form 4562 not claimed on Form 1125-A or elsewhere on return (attach Form 4562) instructions 21 Depletion for limitations 22 Advertising on 23 Pension, profit-sharing, etc., plans deductions.) 24 Employee benefit programs 25 Reserved for future use 26 Other deductions (attach statement) 27 Total deductions. Add lines 12 through 26 28 Taxable income before net operating loss deduction and special deductions. Subtract line 27 from line 11 29a Net operating loss deduction (see instructions) 29a b Special deductions (Schedule C, line 24) ( 29b C C Add lines 29a and 29b 30 Taxable income. Subtract line 29c from line 28. see instructions 31 Total tax (Schedule J, Part I, line 11) , 32 2019 net 965 tax liability paid (Schedule J, Part II, line 12) 33 Total payments, credits, and section 965 net tax liability (Schedule J, Part III, line 23) Refundable 34 Estimated tax penalty. See instructions. Check if Form 2220 is attached Credits, and 35 Amount owed. If line 33 is smaller than the total of lines 31, 32, and 34, enter amount owed 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 0 28 0 0 29c 30 31 0 32 33 34 35 Installment (1) Required cumulative (2) Estimated tax (3) Required payment (per payment under payment based on quarter) under prior annualized method current year tax year tax method liability (4) Required cumulative payment (5) Actual payments Underpayment penalty 1st quarter 2nd quarter 3rd quarter 4th quarter