Michael Smith has provided you with the current years income statement for Palo Alto, Inc. Reconcile book income to taxable income.

	Palo Alto, Inc.
	Income Statement
	Current Year
			Book - Tax Adjustments
	Book Income/(Loss)		(DR)	Cr	Taxable Income
Revenue from sales	$64,800,000
Cost of Goods Sold	-45,600,000
Gross profit	$19,200,000
Other income:
Interest income	75,000	(1)
Miscellaneous income	80,000
Gross Income	$19,355,000
Expenses:
Compensation	-9,630,000	(2)
Stock option compensation	-350,000	(3)
Advertising	-1,950,000
Repairs and Maintenance	-658,000
Rent	-857,000
Bad debt expense	-50,000	(4)
Depreciation	-1,750,000	(5)
Warranty expenses	-95,000	(6)
Meals and entertainment	-60,000
Life insurance premiums	-25,000	(7)
Federal income tax expense	-1,250,000
Other expenses	-350,000	(8)
Total Expenses	-17,025,000
Net Income	2,330,000
Notes
(1)	Of the $75,000 interest income, $25,000 is from California State municipal bond.
(2)	This includes total officer compensaiton of $2,950,000 (no one officer received more than $1,000,000 compensation).
(3)	This amount is the portion of incenctive stock option compensation that was expensed during the year (recepiants are officers).
(4)	Palo Alto wrote off $35,000 of its accounts receivable as uncollectible.
(5)	Tax depreciation for the year was $2,300,000.
(6)	In the current year, Palo Alto did not make any actual payments on warranties it provided to customers.
(7)	Premiums on key employee life insurance policies
(8)	This includes $10,000 of Politial Contributions.