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

Account Title Debit/ Credit

Net Sales 3,230,000 - under credit

Dividends rec 10,000(1)- under credit

Interes income 18,000 (2) - under credit

Gain on sale of stock 9,000 (3) - under credit

Key-person life insurance proceeds 100,000 -under credit

Cost of goods sold 2,000,000 under debit

Salaries and wages 500,000 under debit

bad debts 13,000(4) under debit

payroll taxes 62,000 under debit

interest expense 12,000(5) under debit

charitable contributions 50,000 (6) under debit

depreciation 70,000 (7) under debit

other expenses 40,000 (8) under debit

federal income taxes 108,465 under debit

net income 11,535 under debit

total 3,367,000 3,367,000 total for both debit and credit

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. Rocket has a $90,000 NOL carryover from prior years

required:

a. prepare a worksheet reconciling rockets book income with its taxable income before special deductions. six columns should be used-two (one debit and one credit) for each of the following three major headings:book income, schedule m-1 adjustments, and taxable income

b. prepare a tax provision reconciliation as in step 9 of the tax provision process assume a 21% corporate tax rate

Account Title	Book Income		Adjustments		Taxable Income
	debit	credit	debit	credit	debit	credit
Net Sales		3,230,000
Dividends		10,000
Interest		18,000
Gain on sale of stock		9,000
key person life insurance proceeds		100,000
COGS	2,000,000
Salaries & Wages	500,000
Bad Debts	13,000
Payroll Taxes	62,000
Interest Expense	12,000
Charitable Contribution	50,000
Depreciation	70,000
Other Expenses	40,000
Federal Income Taxes	108,465
Net Income	511,535
Total	3,367,000	3,367,000

Answer rating: 100% (QA)

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