Question

FINANCIAL ACCOUNTING II The following facts apply to The Nelson Music Co., for the calendar year ended December 31, 2016: The company purchased new equipment at the beginning of 2016, at a cost of $140,000. For accounting purposes, straight-line depreciation was used, assuming an eight-year useful life. For tax purposes, accelerated cost recovery of $31,000 was allowed. Estimated warranty expenses of $8,400 did not qualify as a tax deduction because actual out-of-pocket expenditures related to repairs and replacements had not been made. ► Pre-tax income on the income statement was $99,800. On July 1, 2014, Nelson acquired all of the common stock of the Jennings Corporation at a cost of $675,000. The fair value of Jennings' net assets at that date was $555,000. The tax law permits amortization of goodwill over a period of 15 years. Nelson wrote off $21,200 of goodwill in 2016 as unrealizable. Nelson paid $19,000 in foreign import duties on inventory that was purchased in Grand Fenwick. The taxing authorities have an annual limitation on import duties from Grand Fenwick, with no carry-forward of the difference. The import-duty deduction was $14,000. The company earned $4,500 in interest on tax-exempt bonds (issued by a federal development agency) that was not taxable in 2016. Prepare a schedule supporting the computation of taxable income for the year 2016.

Answer 1

1 2 Computaton of Taxable income for the year 2016 3 Particulars 4 Income (Pre-Tax) 5 6 Add: Items Debited In Inomce statement but Disallowed Amount in $ Amount in $ 99,800 8 Depreciation as per Staight line Basis 9 Warranty Expenses Disallowed 10 Write off Unrealisable Goodwill in 2016 11 Import duties claimed excess of Tax limits 12 13 Less: Items credited In Inomce statement but Allowed or taxed seperately 17,500 8,400 21,200 5,000 52,100 14 15 Depreciation allowed 16 Amortization of Good will 17 Interest on tax exempt bonds 18 19 Taxable income for the year 2016 31,000 8,000 4,500 43,500 1,08,400 20

1 2 Computaton of Taxable income for the year 2016 3 Particulars Amount in $ 4 Income (Pre-Tax) 5 6 Add: Items Debited In Inomce statement but Disallowed Amount in $ 99800 8 Depreciation as per Staight line Basis 9 Warranty Expenses Disallowed 10 Write off Unrealisable Goodwill in 2016 11 Import duties claimed excess of Tax limits 12 =140000/8 8400 21200 =19000-14000 =+SUM(B8:B11) Less: Items credited In Inomce statement but Allowed 13 or taxed seperately 14 15 Depreciation allowed 16 Amortization of Good will 17 Interest on tax exempt bonds 18 19 Taxable income for the year 2016 20 31000 =+(675000-555000)/15 4500 =+SUM(B15:B17) =+C4+C11-C17 21