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

19,200,000

Other income:

Interest income

75,000

(1)

Miscellaneous income

80,000

Gross Income

$19,355,000

19,355,000

Expenses:

Compensation

-9,630,000

(2)

Stock option compensation

-350,000

(3)

350,000

Advertising

-1,950,000

1,950,000

Repairs and Maintenance

-658,000

-658,000

Rent

857,000

-857,000

Bad debt expense

-50,000

(4)

-50,000

Depreciation

-1,750,000

(5)

550,000

2,300,000

Warranty expenses

-95,000

(6)

95,000

Meals and entertainment

-60,000

-60,000

Life insurance premiums

-25,000

(7)

25,000

Federal income tax expense

-1,250,000

1,250,000

Other expenses

-350,000

(8)

10,000

-340,000

Total Expenses

-15,311,000

-15,845,000

Net Income

4,044,000

3,485,000

Notes

(1)

Of the $75,000 interest income, $25,000 is from California State municipal bond. Tax exempt

(2)

This includes total officer compensaiton of $2,950,000 (no one officer received more than $1,000,000 compensation). Reasonable payment, Deductible.

(3)

This amount is the portion of incenctive stock option compensation that was expensed during the year (recepiants are officers). Not allowable expenses

(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

1. Based on the book income to taxable income reconciliation you completed in week 2, and any feedback provided, use the attached spreadsheet to complete Palo Altos Schedule M-1.(8)

Palo Alto, Inc.
	Schedule M-1
1	Net income 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)
5	Expenses recorded on books this year not deducted on this return
	a. Depreciation
	b. Contributions carryover
	c. Travel and entertainment
6	Add lines 1 through 5	$0
7	Income recorded on books this year not included on this return
	a. Tax exempt interest
8	Deductions on this return not charged against book income this year
	a. Depreciation
	b. Contributions carryover
9	Add lines 7 and 8	0
10	Income (line 28, page 1) line 6 less line 9	$0

This includes $10,000 of Politial Contributions. Not deductible expense