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The answer is not $2,918,467, $2,204,000, nor any answers posted on this site. Croyden is a calendar year, accrual basis corporation. Mr. and Mrs. Croyden

The answer is not $2,918,467, $2,204,000, nor any answers posted on this site.

Croyden is a calendar year, accrual basis corporation. Mr. and Mrs. Croyden (cash basis taxpayers) are the sole corporate shareholders. Mr. Croyden is president of the corporation, and Mrs. Croyden is vice president. Croydens financial records, prepared in accordance with GAAP, show the following information for the year: Use Table 7-1 and Table 7-2

Revenues from sales of goods $ 12,900,000
Cost of goods sold (LIFO) (9,260,000)
Gross profit $ 3,640,000
Bad debt expense $ 24,000
Administrative salaries and wages 612,000
State and local business taxes 135,000
Interest expense 33,900
Advertising 67,000
Annual property insurance premiums 19,800
Annual life insurance premiums 7,300
Depreciation expense 148,800
Repairs, maintenance, utilities 81,000

Croydens records reveal the following facts:

  • Under the UNICAP rules, Croyden had to capitalize $142,800 of administrative wages to inventory. These wages were expensed for financial statement purposes.
  • Because of the UNICAP rules, Croydens cost of goods sold for tax purposes exceeds the cost of goods sold for financial statement purposes by $219,000.
  • Bad debt expense equals the addition to the corporations allowance for bad debts. Actual write-offs of uncollectible accounts during the year totaled $31,200.
  • Administrative salaries include an accrued $50,000 year-end bonus to Mr. Croyden and an accrued $20,000 year-end bonus to Mrs. Croyden. These bonuses were paid on January 17 of the following year.
  • The life insurance premiums were on key-person policies for Mr. and Mrs. Croyden. The corporation is the policy beneficiary.
  • Croyden disposed of two assets during the year. (These dispositions are not reflected in the financial statement information shown.) It sold office furnishings for $45,000. The original cost of the furnishings was $40,000, and accumulated MACRS depreciation through date of sale was $12,700. It also exchanged transportation equipment for a 15 percent interest in a partnership. The original cost of the transportation equipment was $110,000, and accumulated MACRS depreciation through date of exchange was $38,900.
  • MACRS depreciation for assets placed in service in prior years (including the office furnishings and transportation equipment disposed of this year) is $187,600. The only asset acquired this year was new equipment costing $275,000. The equipment has a seven-year recovery period and was placed in service on February 11. Assume that Croyden does not elect Section 179 or bonus depreciation with respect to this acquisition.
  • Croydens prior-year tax returns show no nonrecaptured Section 1231 losses and a $7,400 capital loss carryforward.

Required:

Solely on the basis of these facts, compute Croydens taxable income.

TABLE 7.1 Recovery Periods for Tangible Business Assets

MACRS Recovery Period Assets Included
3 years Small manufacturing tools, racehorses and breeding hogs, special handling devices used in food manufacturing.
5 years Cars, trucks, buses, helicopters, computers, typewriters, duplicating equipment, breeding and dairy cattle, cargo containers, new farming machinery and equipment.
7 years Office furniture and fixtures, railroad cars and locomotives, most machinery and equipment.
10 years Single-purpose agricultural and horticultural structures; assets used in petroleum refining, vessels, barges, and other water transportation equipment; fruit- or nut-bearing trees and vines.
15 years Certain building improvements; land improvements such as fencing, roads, sidewalks, bridges, irrigation systems, and landscaping; telephone distribution plants; pipelines; billboards; and service station buildings.
20 years Certain farm buildings, municipal sewers.
25 years Commercial water utility property.
27.5 years Residential rental real property (duplexes and apartments).
39 years Nonresidential real property (office buildings, factories, and warehouses).
50 years Railroad grading or tunnel bore.

TABLE 7.2 MACRS for Business Personalty (Half-Year Convention)

Recovery Period
Year 3-Year 5-Year 7-Year 10-Year 15-Year 20-Year
Depreciation Rate
1 33.33% 20.00% 14.29% 10.00% 5.00% 3.750%
2 44.45 32.00 24.49 18.00 9.50 7.219
3 14.81 19.20 17.49 14.40 8.55 6.677
4 7.41 11.52 12.49 11.52 7.70 6.177
5 11.52 8.93 9.22 6.93 5.713
6 5.76 8.92 7.37 6.23 5.285
7 8.93 6.55 5.90 4.888
8 4.46 6.55 5.90 4.522
9 6.56 5.91 4.462
10 6.55 5.90 4.461
11 3.28 5.91 4.462
12 5.90 4.461
13 5.91 4.462
14 5.90 4.461
15 5.91 4.462
16 2.95 4.461
17 4.462
18 4.461
19 4.462
20 4.461
21 2.231

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