NOTE: All deductions, phase-out amounts, taxes, etc. are to be derived from the 2015 tax laws and rates.
Be Hapy Corporation, a fiscal year, accrual basis C corporation, has income and expense for the year ended June 30, 2016 as follows:
Sales Revenues 2,000,000
less: Cost of Goods Sold (1,200,000)
Gross Profit on Sales 800,000
Meals and entertainment 100,000
Bad debt expense 30,000
Depreciation expense 80,000
Contingency loss 50,000
Other operating expenses 220,000
Total Operating Expenses (480,000)
Income before taxes 320,000
less: Income tax expense (125,800)
Net Income 194,200
In addition, a review of Be Happy's books and records reveal the following information:
1. Be Happy expensed, for book purposes, meals and entertainment costs totaling $100,000 for the year. These costs were incurred by Be Happy's sales personnel, were reasonable in amount and the purpose of the meals were documented in the company's records.
2. During April, 2016, Be Happy was sued by one of its employees as a result of a work-related accident. The suit has not yet gone to court for a hearing. Be Happy's auditors required the company to record a contingent liability (and related book expense) for $50,000, reflecting the company's likely liability from the suit.
3. Be Happy recorded federal income tax expense for book purposes of $125,800.
4. Be Happy uses the Reserve Method for calculating bad debt expense for book purposes. Its fiscal 2015 book income statement reflects bad debt expense of $30,000, calculated as .015% of yearly sales revenue. Actual write-off of accounts receivable during fiscal 2015 totaled $22,000.
5. MACRS depreciation, taken on the tax return, totaled $95,000 for the year.
REQUIRED:
1. Compute, in schedule format, Be Happy's taxable income and regular income tax.
2. Prepare a Schedule M-1, Page 5, Form 1120, reconciling Be Happy's book income and taxable income.
3. Include a separate schedule calculating Be Happy's income tax per books and its income tax per the tax return.