[misoc23]

Azure, a C corporation, reports the following:

Pretax book income of $543,000.

Depreciation on the tax return is $20,000 greater than depreciation on the financial statements.

Rent income reportable on the tax return is $36,000 greater than rent income per the financial statements.

Fines for pollution appear as a $10,000 expense in the financial statements.

Interest earned on municipal bonds is $25,000.

What is Azure’s taxable income?

a. $543,000

b. $528,000

c. $559,000

d. $544,000

The answer is D, if someone could explain it to me that would be great. I understand that the fines need to be added back and the interest is subtracted. What about the depreciation and rent? Thank you in advance

[AJG38]

Starting with the Pre-Tax book income you make the following adjustments:

Book Income: $543,000

1. (-) 20,000 for depreciation; as stated the dep. is 20,000 higher on tax return, so you are increasing the expense, thereby decreasing taxable income

2. (+) 36,000 for rental income, as stated, it is 36,000 higher on tax return

3. (+) 10,000 for fines, as fines and penalties are not tax deductible, thereby reducing the book expense, increasing taxable income

4. (-) municipal bond income, it is tax deductible

Specifically for the depreciation and rent, as tricky as the question appears, it is pretty simple as it tells you directly how each one is reflective of book income, thereby giving you the info to either increase/decrease book income for taxable income sake

AJG

AUD - 91 (4/7/2015)
BEC - 88 (4/29/2015)
FAR - 80 (5/29/2015)
REG - 70 (8/18/2015); 82 (11/08/2015)

Gleim & Ninja Flashcards

[makiu]

@misoc23

M-1 Reconciliation

Net Income( accrual method)

+ Federal Income tax

+Excess of capital losses over capital gains

+income subject to tax not recorded on books ( RENT) …

+Expenses recorded on books not deducted on the tax return

-Income recorded on books not subject to tax

-Deductions on the tax return not charged against book income( DEPRECIATION)

=taxable income

… in short there are some temporary and permanent differences that must be reconcile in order to obtain taxable income, that's basically the concept been tested.

[Author]

Replies