M3 Differences Between Book and Tax Flashcards
MCQ-06707
An accrual-basis C corporation that prepared its financial statements based on GAAP recorded $800,000 of bad debt expense. The total amount of bad debts that actually became worthless was $930,000. In respect to bad debt expense, what type of disclosure should the corporation show on Schedule M-3?
A temporary difference in which tax deductions exceed book deductions by $130,000.
For GAAP purposes, accrual-basis corporations are required to determine bad debt expense based on the allowance method. However, for tax purposes the bad debt deduction is based on the direct write-off method. Thus, the corporation in this problem deducted $930,000 of bad debts on its tax return but recorded a bad debt expense of only $800,000 on its GAAP financial statements. Thus, tax deductions exceeded book deductions by $130,000. The book/tax difference in the bad debt deduction is considered a temporary difference.
MCQ-05301
Which of the following items should be included on Schedule M-1, Reconciliation of Income (Loss) per Books With Income per Return, of Form 1120, U.S. Corporation Income Tax Return, to reconcile book income to taxable income?
Premiums paid on key-person life insurance policy.
Schedule M-1 reports the reconciliation of income (loss) per books to income (loss) per the tax return. (Note: It reports both permanent and temporary differences that are discussed in the Financial textbook for deferred taxes.) Items that are included on this schedule are those that are (1) reported as income for book purposes but not for tax purposes; (2) reported as an expense for book purposes but not for tax purposes; (3) reported as taxable income for tax purposes
but not as income for book purposes; and (4) reported as deductible for tax purposes but not as an expense for book purposes. The only option above that falls into one of these four categories is option b. Premiums paid on a key-person life insurance policy are proper GAAP expenses for book purposes, but they are not allowable deductions for tax purposes.
MCQ-02243
Would the following expense items be reported on Schedule M-1 of the corporation income tax return showing the reconciliation of income per books with income per return?
- Interest Incurred on Loan to Carry U.S. Obligations
- Provision for State Corporation Income Tax
No; No
Schedule M-1 of Form 1120 is used to reconcile the differences between book income and taxable income. Because the interest incurred on loans to carry U.S. obligations and the
provision for state corporation income tax are treated the same for both book purposes and tax return purposes, no Schedule M-1 adjustment is required. However, if the interest expense were to carry nontaxable municipal obligations, then the interest would not be tax deductible and would be an adjustment on the Schedule M-1 reconciliation.
MCQ-08194
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?
$544,000
Pretax book income 543,000
Depreciation for tax purposes in excess of book depreciation (20,000)
Rent income for tax purposes in excess of book rent income 36,000
Fines expensed for book purposes but not deductible for tax purposes 10,000
Municipal bond interest not taxable for tax purposes (25,000)
Total Taxable income $544,000
MCQ-04100
Filler-Up is an accrual-basis calendar-year C corporation. Filler-Up uses an allowance method for accounting for bad debts. The allowance for bad debts was $20,000 at the beginning of the year and $30,000 at the end of the year. During the year, Filler-Up wrote off $5,000 of uncollectible receivables and accrued an additional $15,000 of expenses for accounts estimated to be uncollectible. What is the Schedule M-1 adjustment on Filler-Up’s federal income tax return?
$10,000 increase in taxable income.
For tax purposes, Filler-Up may only deduct the amount of uncollectible receivables actually written off during the year, which in this case was $5,000. For financial accounting purposes, Filler-Up recorded $15,000 of expenses for accounts estimated to be uncollectible. So, the amount recorded as an expense for financial accounting purposes was $10,000 more than that allowed to be deducted for tax purposes. On the Schedule M-1 reconciliation, that $10,000 difference must be added back in reconciling financial accounting income to taxable income.
MCQ-04896
In Year 4, Superior Corp. an accrual-basis calendar year corporation, reported book income of $500,000. Included in that amount was $25,000 of municipal bond interest income, $100,000 of federal income tax expense, $10,000 of political party contributions, and $8,000 of tax penalty paid as a result of the audit of the Year 1 tax return which was completed during Year 4. What amount should Superior Corp.’s taxable income be on the Form 1120, U.S. Corporation Income Tax Return for Year 4?
$593,000
Certain items are treated differently for book and tax purposes. The corporation’s book income was $500,000. For tax purposes, the $25,000 of municipal bond interest
income is non-taxable, the $100,000 of federal income tax expense is non-deductible, and both the $10,000 of political party contributions and the $8,000 tax penalty are nondeductible.
Book income $500,000
Federal taxes (add) 100,000
Political expenses (add) 10,000
Penalties (add) 8,000
Municipal bond income (subtract) (25,000)
MCQ-11077
Prime Corp. is an accrual basis, calendar year C corporation. Its current year reported book income before federal income taxes was $300,000, which included $17,000 corporate bond interest income. A $20,000 expense for term life insurance premiums on corporate officers was incurred. Prime was
the policy owner and beneficiary. What was Prime’s current year taxable income as reconciled on Prime’s Schedule M-1, Reconciliation of Income (Loss) per Books With Income per Return, of Form 1120, U.S. Corporation Income Tax Return?
$320,000
To arrive at taxable income, term life insurance premiums are added back to book income because they are not deductible for taxable income purposes ($20,000 + $300,000 = $320,000).
MCQ-11080
Vital Corp. is an accrual basis, calendar year C corporation. Its Year 2 reported book income before federal income taxes was $500,000. Included in that amount were the following items:
Year 1 state franchise tax refund $50,000
Municipal bond interest income 7,500
What should be the amount of Vital’s Year 2 taxable income as reconciled on Vital’s Schedule M-1 of Form 1120, U.S. Corporation Income Tax Return?
$492,500
To arrive at taxable income, municipal bond interest income is subtracted from book income because it is not included in taxable income. Vital Corp.’s taxable income is $492,500
($500,000 – $7,500).
MCQ-14676
For the current year, Kelly Corp. had net income per books of $300,000 before the provision for federal income taxes. Included in the net income were the following items:
-Dividend income from an unaffiliated domestic taxable corporation (taxable income limitation does not apply and there is no portfolio indebtedness) $50,000
-Bad debt expense (represents the increase in the allowance for doubtful accounts) 80,000
Assuming no bad debt was written off, what is Kelly’s taxable income for the current year?
$355,000
Book net income $300,000
Nondeductible bad debt expense 80,000
Dividends-received deduction (25,000)
Total $355,000
MCQ-05993
Jagdon Corp.’s book income was $150,000 for the current year, including interest income from municipal bonds of $5,000 and excess capital losses over capital gains of $10,000. Federal income tax expense of $50,000 was also included in Jagdon’s books. What amount represents Jagdon’s taxable income for the current year?
$205,000
Taxable income is accounting (book) income adjusted for other items. In this question, the book income is $150,000. That book income includes $50,000 federal income tax expense, and that amount should be added back for taxable income. The $5,000 interest income from municipal bonds should be subtracted because it is not taxable, and the $10,000 excess capital
losses over capital gains should be added back because the excess is not a deduction in the current year. The net result is $205,000.
MCQ-02039
In Year 1, Starke Corp., an accrual basis calendar year corporation, reported book income of $380,000. Included in that amount was $50,000 municipal bond interest income, $170,000 for federal income tax expense, and $2,000 interest expense on the debt incurred to carry the municipal bonds.
What amount should Starke’s taxable income be as reconciled on Starke’s Schedule M-1 of Form 1120, U.S. Corporation Income Tax Return?
$502,000
Municipal bond interest, the interest expense on debt incurred to carry the municipal bonds, and federal income tax expense will be adjustments to taxable income.
Reported book income $380,000
Municipal bond interest (50,000)
Federal income tax expense 170,000
Interest to carry municipal bonds 2,000
Taxable income $502,000
