I have corporate tax in school right now as well and we just went over some basic E&P stuff, well like 5 weeks ago.
You have to remember that your starting point of e&p is net income, so if it was already included in E&P in previous years, you need to lower income in year 2 so that e&P is not overstated. As an example…
Let's say you have an installment sale.. cost 200,000, sales price of 300,000. The sale happens on 11/30/x1 with payments starting in year 2, they have a gain of 100,000 but for tax purposes they elect the installment sale and won't recognize any because they don't receive payments until year 2.
So lets say for tax purposes no income is recognized in year 1. For E&P purposes you recognize the full 100,000 gain.
In year 2 they receive 150,000 cash. For tax purposes they will recognize 50,000 in gross profit (100,000 profit / 300,000 = 1/3) For E and P purposes they will DECREASE E and P by the 50,000 because the full 100,000 was already included in year 1 and current income is overstated as a starting point for E& P.
FAR - 84
AUD - 94
REG - 86
BEC - 86
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