[The following information applies to the questionsdisplayed below.]fNotes with important taxinformation are provided below
XYZ is a calendar-year corporation that began business onJanuary 1, 2017. For 2018, it reported the following information inits current year audited income statement. Notes with important taxinformation are provided below. Exhibit 16-6.
| XYZ corp. | Book
Income |
| Income statement |
| For current year |
| Revenue from sales | $ | 40,000,000 | |
| Cost of Goods Sold | | (27,000,000 | ) |
| Gross profit | $ | 13,000,000 | |
| | | |
| Other income: | | | |
| Income from investment in corporate stock | | 300,000 | 1 |
| Interest income | | 20,000 | 2 |
| Capital gains (losses) | | (4,000 | ) |
| Gain or loss from disposition of fixed assets | | 3,000 | 3 |
| Miscellaneous income | | 50,000 | |
| Gross Income | $ | 13,369,000 | |
| Expenses: | | | |
| Compensation | | (7,500,000 | )4 |
| Stock option compensation | | (200,000 | )5 |
| Advertising | | (1,350,000 | ) |
| Repairs and Maintenance | | (75,000 | ) |
| Rent | | (22,000 | ) |
| Bad Debt expense | | (41,000 | )6 |
| Depreciation | | (1,400,000 | )7 |
| Warranty expenses | | (70,000 | )8 |
| Charitable donations | | (500,000 | )9 |
| Meals | | (18,000 | ) |
| Goodwill impairment | | (30,000 | )10 |
| Organizational expenditures | | (44,000 | )11 |
| Other expenses | | (140,000 | )12 |
| Total expenses | $ | (11,390,000 | ) |
| Income before taxes | $ | 1,979,000 | |
| Provision for income taxes | | (720,000 | )13 |
| Net Income after taxes | $ | 1,259,000 | 14 |
|
Notes:
- XYZ owns 30 percent of the outstanding Hobble Corp. (HC) stock.Hobble Corp. reported $1,000,000 of income for the year. XYZaccounted for its investment in HC under the equity method and itrecorded its pro rata share of HC's earnings for the year. HC alsodistributed a $200,000 dividend to XYZ.
- Of the $20,000 interest income, $5,000 was from a City ofSeattle bond (issued in 2017), $7,000 was from a Tacoma City bondissued in 2015, $6,000 was from a fully taxable corporate bond, andthe remaining $2,000 was from a money market account.
- This gain is from equipment that XYZ purchased in February andsold in December (i.e., it does not qualify as §1231 gain).
- This includes total officer compensation of $2,500,000 (no oneofficer received more than $1,000,000 compensation).
- This amount is the portion of incentive stock optioncompensation that vested during the year (recipients areofficers)
- XYZ actually wrote off $27,000 of its accounts receivable asuncollectible.
- Tax depreciation was $1,900,000.
- In the current year, XYZ did not make any actual payments onwarranties it provided to customers.
- XYZ made $500,000 of cash contributions to qualified charitiesduring the year.
- On July 1 of this year XYZ acquired the assets of anotherbusiness. In the process it acquired $300,000 of goodwill. At theend of the year, XYZ wrote off $30,000 of the goodwill asimpaired.
- XYZ expensed all of its organizational expenditures for bookpurposes. It expensed the maximum amount of organizationalexpenditures allowed for tax purposes.
- The other expenses do not contain any items with book-taxdifferences.
- This is an estimated tax provision (federal tax expense) forthe year. Assume that XYZ is not subject to state incometaxes.
Estimated tax information:
XYZ made four equal estimated tax payments totaling $480,000.Assume for purposes of estimated tax penalties, assume XYZ reporteda tax liability of $800,000 in 2017. During 2018, XYZ determinedits taxable income at the end of each of the four quarters asfollows:
| Quarter-end | Cumulative taxable income (loss) |
| First | $ | 350,000 |
| Second | $ | 800,000 |
| Third | $ | 1,000,000 |
|
Finally, assume that XYZ is not a large corporation for purposesof estimated tax calculations. (Do not round intermediatecalculations. Round your answers to the nearest dollaramount.)
a. Compute XYZ’s taxable income.
ANSWER FOR A IS 1,868,360
b. Compute XYZ’s income tax liability.
