Micro, an accrual basis corporation, reported $505,100 net income before tax on its financial statements prepared in accordance with GAAP. Micros records reveal the following information:

• Micro paid $25,000 in legal fees and $100,000 to a former employee to settle a claim of sexual harassment. To avoid negative publicity, Micro insisted that the settlement include a confidentiality agreement.
• Late in the year, Micro entered into a five-year licensing agreement with an unrelated firm. The agreement entitles the firm to use a Micro trade name in marketing its own product. In return, the firm will pay Micro an annual royalty of 1 percent of gross revenues from sales of the product. The firm paid a $40,000 advanced royalty to Micro on the day the agreement was finalized. For financial statement purposes, this prepayment was credited to an unearned revenue account.
• At its final meeting for the year, Micros board of directors authorized a $15,500 salary bonus for the corporations president to reward him for an outstanding performance. Micro paid the bonus on January 12. The president doesnt own enough Micro stock to make him a related party for federal tax purposes.
• Micro was incorporated last year. On its first tax return, it reported a $21,400 net operating loss.

The answer is not 40000, or -40000 or 40400, -40400, 39600,-39600 either.

$ 505,100 Micro's net book income before tax Sexual harassment settlement and legal fees 125,000 Prepaid royalty income (32,000) Accrued bonus expense C NOL carryforward deduction (21,400) Micro's taxable income $ 576,700 $ 505,100 Micro's net book income before tax Sexual harassment settlement and legal fees 125,000 Prepaid royalty income (32,000) Accrued bonus expense C NOL carryforward deduction (21,400) Micro's taxable income $ 576,700