Converting Book Income to Taxable Income. The following income and expense accounts appeared in the accounting records of Rocket Corporation, an accrual basis taxpayer, for the current calendar year.
Book Income
These are all Credits
Net Sales $3,230,000
Dividends 10,000 (1)
Interest 18,000 (2)
Gain on Sale of stock 9,000 (3)
Key-person life insurance proceeds 100,000
These are all debits
Cost of goods sold $2,000,000
Salaries and wages $500,000
Bad Debts 13,000 (4)
Payroll Taxes 62,000
Interest Expense 12,000 (5)
Charitable Contributions 50,000 (6)
Depreciation 70,000 (7)
Other expenses 40,000 (8)
Federal Income Taxes 168,000
Net Income 452,000
Total Debits $3,367,000 Total Credits $3,367,000
The following additional information applies.
1. Dividends were from Star Corporation, a 30%-owned domestic corporation
2. Interest revenue consists of interest on corporate bonds, $15,000 and municipal bonds;$3,000
3. Stock is a capital asset held for three years prior to sale
4. Rocket uses the specific write off method of accounting for bad debts
5. Interest expenses consists of $11,000 interest incurred on funds borrowed for working capital and $1,000 interest on funds borrowed to purchase municipal bonds.
6. Rocket paid all contributions in cash during the current year to State University
7. Rocket calculated depreciation per books using the straight-line method. For income tax purposes, depreciation amount to $95,000
8. Other expenses included premiums of $5,000 on the key-person life insurance policy covering Rocket's president who died in December
9. Qualified productions activities income is $300,000
10. Rocket has a $90,000 NOL carryover from prior years.
Required: Prepare a worksheet reconciling Rocket's book with its taxable income (before special deductions)
Six columns should be used-two( one debit and one credit).
For each of the three major headings book income, schedule M-1 Adjustments and taxable income.